Daily Voice | Earnings Upgrade To Take A Pause As Input Cost Weighs On India Inc Margins, Says Pankaj Tibrewal Of Kotak AMC

The best of market breadth is behind us and, going forward, while earnings of overall index remains durable, there would be greater dispersion of winners and losers, suggesting that it could be a stock-pickers’ market, believes Pankaj Tibrewal, Equity Fund Manager at Kotak Mahindra Asset Management Company.

The US Dollar Index (DXY) is inversely related to Indian stocks and the rising DXY index could be a source of volatility in the coming months, according to him.

“The earnings upgrade cycle, which has been supportive of the markets over the last few quarters should take a pause as input cost pressures weigh on the margins of Corporate India,” says the seasoned professional with exposure to the mutual fund industry and experience in managing a host of debt and equity schemes.

Do you think the market is expected to correct more in the coming months, even after falling more than 6 percent from record highs?

This has been a good year for the Indian equities. India appears to be in a structural uptrend with a likely new profit cycle, improvement in capex trends and supportive policy environment. However, in the near term, we are cautious on the overall markets.

Absolute valuations for India remain well above the historical averages and positive earnings revision which we see is concentrated mainly in the commodities sector.

Going ahead, in our view, the earnings upgrade cycle, which has been supportive of the markets over the last few quarters, should take a pause as input cost pressures weigh on the margins of Corporate India. Strong performance of Indian markets has led to Indian equities premium to emerging markets (EM) equities going up to decade-high levels.

In our view, the best of the market breadth is behind us and going forward, while earnings of the overall index remains durable, there would be greater dispersion of winners and losers, suggesting that it could be a stock pickers market.

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What could be the reasons behind the significant FII selling taking place in the equity market? What is the indication you get from gradual rising in the US dollar index?

The 2021 flows are at $8.3 billion, but the bulk of it came in the first three months of the year, while flows since April 2021 to till date are only around $1 billion. In our discussion, FII investors seem to believe that there is better value elsewhere, given India’s strong rally this year. MSCI India Index has outperformed the MSCI EM Index by almost 30 percent in 2021 till date.

The US Dollar Index (DXY) is inversely related to Indian stocks and rising DXY index could be a source of volatility in the coming months.

Do you think investors should be more cautious on the equity market now and shift focus to other asset classes?

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We believe that after a sharp rally in the market over the last 18 months, investors should exert some caution in the near term. This has been the third longest rally in the markets without even 10 percent correction. The advice to investors would be not to invest in equity markets looking at the past one-year returns. After the strong rally, one should moderate return expectations going forward.

Also, equities as an asset class can be volatile in the short to medium term. One might even see a sharp drop in portfolio value and that too suddenly. So only those who are willing to fathom this kind of volatility should invest in them.

We would advise investors to follow asset allocation and be disciplined in their investment approach. At the current juncture, anyone considering fresh investments, can stagger their investments through Systematic Investment Plan (SIP) or Systematic Transfer Plan (STP).

What are the key themes that you are betting on for 2022?

Well, let’s go down the preferred themes one by one.

Revival of residential real estate

We are positive on is the revival of the residential real estate cycle led by lower mortgage rates, best affordability in the last two-and-a-half decades, stagnant property prices and need for bigger houses after COVID. We are positive on the home improvement and building material space and believe that real estate ancillary industries are the best proxy to ride the revival in residential real estate.

Big becoming bigger, strong getting stronger

The theme of consolidation and market share gains within sectors continues to play out. We seek to focus on sectoral leaders, companies, which are gaining market share in their sectors. The shift from the unorganised to the organised continues and company balance sheets by and large are stronger now than a few years ago.

Revival of investment cycle

Corporate India has deleveraged over the last few years and balance sheet of India Inc are in good shape after COVID. Most corporates across sectors are looking to deploy the cash flows back on expansion. Also PLI and ‘China plus one’ helping the investment cycle. We are positive on capital goods and industrial sector.

What is the top wall of worries the market is going to face?

An upward shift in the US interest rate cycle, rising oil prices, a potential third wave of COVID-19, higher domestic rates, strong trailing outperformance versus emerging markets (30ppt over six months) and exuberance in the broad market are expected to be the top wall of worries that the market is going to face in coming months.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Do you think the market is expected to correct more in the coming months, even after falling more than 6 percent from record highs?

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