Nilesh
Shah
Joint
president and MD, Kotak AMC
Source :
Equity markets are at a crossroads on Omicron: FPIs vs Domestic
Investors, Inflation, and Expectations vs Delivery. Omicron seems to have
peaked in South Africa without much hospitalisation and death rates. It is
creating havoc in the US, Europe and Korea. India so far has withstood Omicron
well. There is an upside to the market if it doesn't result in a
lockdown/significant disruption in economic activities.
Suppose it is the other way, then there will be a downside to the market.
India's massive outperformance over its peers in the MSCI EM index since March
2020 lows has pushed many FPIs to book profit. A few foreign brokerage houses
have given short, profit-booking calls on India considering the valuation gap
vs peers.
While FPIs have continued to invest
in primary markets and unlisted shares, they have been selling in the secondary
market in the last few months. Domestic investors who have made tonnes of money
since March '20 lows have been regular buyers. If domestic investors absorb FPI
selling, there is an upside to the market. Suppose FPIs exhaust domestic
investor buying; then there could be some downside. FPI selling this time is
measured, unlike rapid-fire selling like March '20.
Globally, inflation and
inflationary expectations have risen. After being criticised on
"transitory inflation," the US Fed has indicated winding down
excessively soft monetary policy by reducing bond-buying and undertaking policy
rate hikes. The bond market is betting against that by making a flat yield
curve. If inflation is persistent and elevated, the US Fed will have to take
aggressive action, which can adversely impact US and global markets. However,
if the bond market prevails or Omicron forces the US Fed to ignore
inflation and focus on growth, there will be an upside to the market.
Omicron, global inflation and FPI activity, or
some other factors will continue to impact the market in the near term. Markets
will be keenly watching December '21 quarterly results and the Budget.
Corporate Profitability to GDP ratio had fallen from mid-single-digit in FY08
to low single-digit in FY20. It has started an upward journey since then. The
Street will keenly watch quarterly results for continuity of that trend. We
believe the results will be ahead of expectations and provide downside protection
to the market. FY22 budget provided a healing touch to the economy. FY23 budget
has to accelerate growth and support equitable distribution.
Better-than-expected quarterly results and a pro-growth Budget will make
markets more attractive for investors.
Stock selection will be vital to
making money in CY22. There are a few pockets of excess valuations. It will be
rewarding to avoid expensive stocks with low-floating stocks and concentrated
holdings. We believe a few themes can give outperformance in CY22 and beyond;
Industry leaders will outperform
smaller peers as the strong become stronger and the big become bigger.
A company doing faster and better adoption of
the digital ecosystem than peers will be an outperformer.
Home improvement, engineering, capital goods and
pharma companies could outperform the market.
It will be appropriate to moderate return
expectations as it is a reasonably priced market. We recommend investors to
maintain a neutral allocation to equity as an asset class, be marginally
overweight on large caps and marginally underweight on small/mid-caps. We
expect market to remain a "Buy on Dips market". There will be
volatility/corrections, which an investor will have to capture through
disciplined asset allocation.
Tighten your seat belt but don't leave the roller coaster. The ride will be enormously enjoyable.
Read more at:
No comments:
Post a Comment