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Market valuation to stay high on corporate profitability, possible inflows: Shiv Sehgal, president & head, institutional equities, Edelweiss Securities

However, this now seems to be changing with policymakers now looking to decisively tame inflation (late cycle) as compared to supporting growth (early cycle) in the previous years. Not only that, the pace of tightening is probably the fastest seen in decades.

Shiv Sehgal, president & head, institutional equities, Edelweiss Securities
Shiv Sehgal, president & head, institutional equities, Edelweiss Securities

The year 2022 will be different from the previous couple of years. However, Indian markets will continue to trade at a higher valuation backed by strong corporate profitability and prospects of inflows from foreign investors in the upcoming months, says Shiv Sehgal, president & head, institutional equities, Edelweiss Securities, in an interview with Ruchit Purohit. Edited excerpts:

What is your outlook for the markets for the current year from here onwards? Have we already priced in factors like geopolitical crisis and the aggressive Fed rate hikes? 
This year is probably going to be a very different year from the last two. Prior to this, since the March 2020 bottom, in our country and globally, too, I feel that it has been a buy-and-hold strategy, which has worked very well. This was mainly owing to policy environment both globally and in India to support growth and nurture recovery. However, this now seems to be changing with policymakers now looking to decisively tame inflation (late cycle) as compared to supporting growth (early cycle) in the previous years. Not only that, the pace of tightening is probably the fastest seen in decades.

US 2 years, has jumped by 200bps in last 6 months — an unprecedented rise. This is thus leading a sharp rise in volatility and a rare phenomenon of both debt as well as equities being under pressure. This cautious approach also shows up in my interaction with clients – where focus has shifted from hunting for multi-baggers to protecting capital. The overall market perception has also moved from ‘buy and hold’, to a trading mentality. Going ahead, Fed is talking about 7-8 rate hikes. I feel that Fed will not be able to be so aggressive as global debt remains quite high, thus making it very vulnerable to tightening. There is a risk that global growth slows down materially, forcing Fed to back off earlier. However, this may not be all bad for India as commodity prices could cool, and given India’s higher growth potential earnings on relative basis could be better. The downside risk to Nifty is around 15,800-16,000, while on the upside we can see 19,500-20,000 by year-end.

With rising commodity prices, inflation, and the ongoing geopolitical concerns, have you tweaked your earnings estimates? 
The impact of commodities on overall Nifty earnings is neutral to positive, given the large weight of commodity sectors present in it. Thus, to that extent, downside risk on aggregate earnings may not be material. However, the bigger worry is likely to be on earnings excluding commodities as demand was weak to begin with and input price shock is only likely to compound the problems. Thus, going ahead there would be material downside risks to Nifty earnings (excluding commodities).

FPIs have sold more than $20 billion since October, however, the markets still held some ground amid domestic buying. What is your view on FPI flows in the coming months and the impact? 
From October to December of last year, there was a little bit of rotation in the emerging market mandates from growth to value. India, being a growth market was at the receiving end, especially given the high valuation premium at which it was trading. The Russia and Ukraine crisis only compounded the problem. However, the positive element of that was the domestic flow. In India now, equity as an asset class is getting bigger and bigger, and it should continue to do so going forward. In my view, going forward, within the emerging markets, India will continue to share a larger pie, given the strong balance sheets and higher growth potential. This will surely attract FPIs back as eventually flows are driven by fundamentals. India will continue to trade at a higher valuation on the back of corporate profitability and prospects of FPI inflows in the upcoming months. The key risk being persistently hawkish Fed.

New-age tech companies that listed last year have faced several challenges so far, what is your outlook on these companies? 
Some of the new-age companies in India are actually solving something in the equilibrium where there is an unmet demand or what some of the large conglomerates have not been able to. Further, the fintechs that got listed in the US by December 2021, were all under the water. About the correction that we saw in new-age companies like Paytm on its listing, I think there was an element of it being excessively priced. Specifically, they still need to execute and show that clear path. I think they’ve ventured into too many things but they need to be focused on what they want to win. The pullback in some of these companies, especially the likes of Nykaa, provided a very good opportunity to buy. There are some very interesting companies in the pipeline like Pharmeasy, of which if I take the three- to five-year view, it can be a multi-bagger. If we look at the demand side of the equation in India and the demographics we have, a well-run company has the potential to be as large as some of their global peers like Amazon, etc. Overall, there is a very healthy pipeline of new-age companies that will come to market in the upcoming months and years, and I think there should good appetite for them, as long as valuations are reasonable.

What are your views on pricing/valuations of the upcoming LIC IPO and will it dry up liquidity from the markets? 
The market perception is something nobody can get right all the time. If Nifty is at 20,000, then of course there could be appetite for a much higher valuation. However, nobody knows that and I don’t have a crystal ball either. But I do feel from a longer-term perspective, the government should look to price it at a reasonable valuation for the investors, given its large size. Yes, when the IPO comes in, some of the mutual funds, insurance companies will probably sell to prop up cash for investing in the IPO. However, this is generally a temporary blip rather than anything else.

Overall, what themes will be in play during the financial year 2022, will financials see a rebound? 
I think, every quarter, things are moving so fast that for me to say that, a year seems to be a long time. At the moment, we are very bullish on commodities and I think commodities are in a multi-year cycle, and we see more upside in commodities. I am personally very bullish on the entire technology space, too, in India. Not only the large-cap, but also the mid-cap technology companies should do very well, despite the recent pullback in the short-term. Further, this year, financials will do very well and people will be surprised with growth.

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