India remains one of the few growth bastions within emerging markets and is likely to garner higher FPI flows, says Shiv Sehgal, president & head of Nuvama Capital Markets. In an interview to Ashley Coutinho, he says while global growth could be soft, domestic demand is likely to remain resilient, which augurs well for Indian equities. Excerpts:
What is your outlook for Indian equities?
In FY23, Indian economy and equities had many battles to fight – a 500 basis points rate hike by Fed, fallout of Russia-Ukraine war which led to spike in global commodity prices, RBI rate hikes, discretionary consumption slowdown and large drawdown of forex reserves. Yet, equities have come out very strong. A lot of those worries are behind us. The commodity price pressure, which hurts domestic companies’ margins, seems to be ebbing. Also, the aggressive rate hikes by central banks had a big dent on valuations. That is now largely behind us. While global growth could be soft, domestic demand is likely to remain resilient. So, to that extent, Indian equities especially the domestic oriented sectors should do well in FY24 as well. Key negatives could emanate from moderation in credit growth as inflation impact fades.
Indian equities seem to be richly valued at this juncture. What is your take on valuations? Are there pockets of value available?
While discussing valuations, it’s very important to take into account growth, capital allocation policy and balance sheets. While valuations do appear expensive to its global peers, its for a reason – strong balance sheets. India is one of the few countries in the world whose debt to GDP is still similar to what it was in 2010. Not only that, India Inc has so far been more prudent in terms of capital allocation with increased focus on dividends and profitability rather than growth at any cost. These factors by design warrant higher valuations. So, I am not too worried on valuations as long as we can deliver growth.
Which sectors are you betting on?
We see value in automobiles, given the benefits of lower input prices. Private banks have underperformed broader markets despite robust fundamentals. IT stocks are already pricing in a recession and any positive surprise can result in a meaningful rerating. Historically, IT has outperformed during all global downturns. Tailwinds from rupee depreciation and high dividend yield are other positives for the sector. Pharma is attractive as falling input prices could boost margins and valuations are now quite reasonable.
After outflows in the early part of the year, India has seen significant FPI inflows in the past a few weeks. What is the outlook for the flows going forward?
The outlook remains strong. The US Fed is probably at the peak of its rate hike cycle as the recent FOMC decision really didn’t disrupt the overall narrative a whole lot, which augurs well for capital flows in general to EMs. With China loosing steam, India remains one of the few growth bastions within EMs and is likely to garner higher flows. While some of the major economies are struggling, both micro and macro are coming together for India. Middle market companies are in much better shape to compete and grow. India skeptics are being converted because of the China factor and want to “friend shore”.
Do you think we are at the end of the global interest rate tightening cycle? How far are we from a pivot by the US Federal Reserve and RBI?
We are at the very fag end of global rate tightening cycle. The Fed’s new 2023 “dot plot” was more hawkish than anticipated, implying another two 25 basis points rate hikes, suggesting Powell and his colleagues aren’t that impressed with the recent disinflation but we think RBI is done with rate hikes. However, from here on expect a prolonged pause with pivot unlikely before Q4FY24.
Are there risks of a global contagion owing to the US banking crisis?
The contagion risks owing to the US banking risks are likely to be much lower than in the past as the size of the problem is much lower than that was prevailing during the global financial crisis. At that time households at large and core US banking system was excessively leveraged, which is not the case today. During GFC, large parts of the world had exposure to US subprime debt, hence, there were ripples of the same across the world. Policymakers are far more agile in dousing the problems before it becomes a systemic one. This time, US treasury’s guarantee to safeguard all depositors helped contain the problem rather quickly. So, while growth could slow down it is unlikely to have a large impact on overall growth outlook.
Domestic institutional investors and retail investors have provided much support to the markets in the past year. You expect that trend to continue?
There is likely to be some moderation here given that fixed deposit rates have become quite high. Nonetheless, we think it is likely to be a near term hiccup and unlikely to have longer term implications.
What is your view on March quarter earnings season?
There was a clear wedge in March quarter earnings between domestic and export-oriented companies’ earnings. Domestic oriented ones enjoyed the tailwinds of stable demand, falling input prices and not very high interest costs. Export oriented companies witnessed demand pressures which led to margin disappointments and earnings downgrades. Going ahead, we expect the wedge to continue with some downgrades likely in global oriented companies but not much in domestic oriented sectors.
The private capex cycle did not take off as expected in FY22 and has lagged government capex during FY20-22. How long before things turn around?
We are clearly seeing signs of a pickup in private capex. In FY23, BSE500 capex increased by 21% YoY led by metals and few conglomerates. Going ahead as well, given the strong balance sheets and stable domestic demand, we expect private capex to continue. The constraints for the same could be high interest rates undermining domestic demand and sharp export slowdown weighing on demand outlook.
