Equity markets have seen deep corrections in recent weeks; both the BSE Sensex and NSE Nifty 50 hit 52-week lows on Friday. Aamar Deo Singh, head advisory at stock broker Angel One says a re-rating across asset classes is inevitable given the ongoing monetary tightening and interest rate hikes by major central banks.
In an interaction with THE WEEK, he says there will be more turmoil in stocks over the next few months, but large correction in quality stocks also offers opportunities to accumulate them in the long-term.
Excerpts:
Equity markets continue to see sharp corrections. What are the major reasons investors remain bearish?
Both domestic and international markets are currently experiencing a significant correction, with double-digit percentage corrections in domestic benchmark indices. Investors seem to be extremely worried about the recent developments, brought on by the Russian-Ukrainian war, which have increased inflationary concerns, sharply increased interest rates across major countries, and caused a slowdown in China due to concerns about the Covid re-emergence. Therefore, a re-rating across asset classes is inevitable when hundreds of billions of dollars are drained out of the financial system in the future to stop inflationary trends. Additionally, the majority of markets are trading below their 52-week lows, which amply demonstrates that investor sentiment is still muted and that a sizeable portion of them has adopted a wait and watch strategy.
What is your outlook on equities over the next 3-6 months?
On the back of poor financial data coming from major economies around the world, there will undoubtedly be more turmoil in the equity market over the next three to six months. Additionally, how the inflationary trajectory performs over the next few months and the effects of the decisions made by central banks throughout the world will be important factors influencing equity markets in the near term. Additionally, it is likely that investors will shift their attention to defensive industries and prioritise finding equities that offer good value.
Interest rates are rising, FIIs continue to sell, and inflation remains high... In this backdrop, what should equity investors do?
Given the level of uncertainty in the equity markets, equity investors would be wise to navigate them with prudence. However, quality equities have also seen a large correction at the same time, providing investors with an opportunity to accumulate them gradually and with a long-term outlook. Since October 2021, FII sellers have been obstinate buyers, selling Indian equity worth more than Rs 3.25 lakh crores. Given the above 30 per cent to 40 per cent decline in several high-quality equities distributed across numerous industries, equity investors with a multi-year holding horizon are in a good position to accumulate in stages.
Do you think money will start flowing into bank deposits and or safe haven assets like gold amid equity market volatility and rising rates?
Indian investors have realised in recent years that equity markets are the finest environment for long-term wealth growth. As a result, investors have undergone a gradual but substantial mental shift that will continue to direct them in their pursuit of wealth development. A longer-term analysis of the performance of other asset types, such gold and bank savings, does not show any appreciable increases. Nevertheless, it is always important to maintain a diversified portfolio across asset classes, depending on the risk tolerance of the individual. Given the current market challenges, a portfolio made up of a combination of equity, gold, and fixed income products is ideally a wise choice.
What's your outlook on interest rates?
Due to the aggressive efforts made by central banks throughout the world to control inflation, which has reached multi-year highs in several nations, interest rates are on the rise both domestically and internationally. Inflation is at an eight-year high in India as well, which is a major problem for consumers. More rate hikes are anticipated this year and are likely to continue into the following year, according to recent actions and statements by important central banks around the world, including the US Federal Reserve, Bank of England (BoE), European Central Bank (ECB), and the Reserve Bank of India (RBI). As long as the globe does not witness a reduction in global inflation, a drop in the price of crude oil, a lowering of commodities prices, interest rates are unlikely to witness any softening.
Amid the market volatility,do you see pockets of opportunity and where?
Markets will always present opportunities to those who search in the right sectors, have the patience and bravery to act when most people are afraid to. Having said that, it is crucial to concentrate on industries and stocks that are defensive in nature and the market leaders in their respective fields. So, a few industries that can be investigated for finding investment prospects include the auto, banking, and chemical industries. Given the current amount of volatility, adopting a more phased strategy to investing would be wise.
One sector that has been hard hit is FMCG; raw material cost pressures on one hand and slowing consumption on the other. Should one invest given the correction that has happened or is there more pressure ahead?
Although the FMCG sector has undoubtedly suffered from a double blow, investors still favour it since FMCG equities exhibit somewhat less volatility than companies in other sectors. As a result, long-term investors that take a cautious approach and have a lower risk appetite are well-positioned to maintain their position in the FMCG story. But again, the best course of action should be to stay with reputable brands. However, one must continue to be ready to handle volatility in the upcoming weeks and months.
Banks over the last few years had cleaned up their balance sheets. In the wake of rising interest rates, what's your outlook on the sector, in terms of credit growth, NPAs etc?
The majority of large banks have improved their capital reserves and taken an active approach to managing their loan portfolios, which is advantageous for them. Aside from the slowdown, increasing loan costs would hurt overall profitability because of the inflationary rise, higher energy prices, supply-side disruptions, to mention a few. Overall, though, Indian banks are better equipped to handle the problems that lie ahead.
Tech stocks, too, have seen corrections and several brokers/ investment banks have downgraded their sectoral outlook in recent times. Tech companies saw huge demand in the pandemic. What has changed now? What's your view on the sector?
Given the recessionary issues affecting both the US and Europe, where a sizeable portion of Indian industry business originates from, the Indian IT sector is facing significant challenges. The US and Europe contribute roughly between 40 and 80 per cent of the sales of Indian IT companies. Therefore, any downturn in the US will undoubtedly affect the IT firms at home. Investors are closely monitoring the emerging situation both in the USA an Europe, so the sector may continue to be under pressure.
Overall how do you see corporate earnings panning out in 2022-23, given the prevailing economic and geo-political issues and how will this impact stocks?
How effectively central banks are able to control inflation and the position that central banks take on interest rates will have a substantial impact on corporate earnings for FY23. Given the World Bank's downgrade of both domestic and global growth, any economic downturn will also have an influence on other sectors. Therefore, it is anticipated that earnings pressure will continue during the upcoming few quarters, but the effects would differ from sector to sector.
