Earnings growth will decide the pace of market recovery: Rajat Rajgarhia

It has mostly been a one-way street for global financial markets the past few months as central banks started hiking rates to restrain runaway inflation. Rajat Rajgarhia, managing director and chief executive officer for institutional equities at Motilal Oswal Financial Services, in conversation with Puneet Wadhwa, says his discussions with global investors indicate they have a positive view on India from a medium- to long-term horizon. Once volatility subsides, he expects foreign institutional investor (FII) flows to turn positive. Edited excerpts:

Do you think the worst of FII selling and commodity price spike – and consequently market correction – is behind us?

Indian markets have seen a healthy correction from the highs clocked up earlier in the year. The Nifty has corrected almost 20 per cent, while the broader market correction has been more. Multiple factors led to this fall, including a sharp correction in US markets, commodity spike, and rate-hike worries. All these led to an unprecedented outflow by FIIs.

Now valuations have become more reasonable and trade at long-term averages. More importantly, there are palpable signs of peak inflation behind us.

As FII selling slows, markets will feel a huge sense of relief. Earnings growth will decide the pace of market recovery.

Do you think FIIs have actually ‘oversold’ India? If they were to return, what will be their pecking order in terms of sectors/stocks?

FIIs have sold nearly $30 billion of Indian equities in 2022 to date. A lot of this selling was driven by global sell-off and redemptions across emerging market funds. Moreover, India had also risen to a higher weight in many portfolios due to its performance. Some adjustment had to happen.

Our discussions with global investors indicate they have a positive view on India from a medium- to long-term horizon.

Once volatility subsides, FII flows will turn positive. The best-loved sectors of FIIs to invest in India have been financial, technology, and consumer.

Are your institutional clients willing to loosen their purse strings, given the fall markets have had in the past few months? If not, what’s holding them back?

We have seen domestic investors being very supportive of markets lately. Even in the past six months of a huge FII sell-off, domestic investors were regular buyers and absorbed the entire impact. We see the flow of retail savings into equities continuing, and may rise in the years to come. An important trend change will come from FIIs - they will come back to raise allocation to India.

For retail investors, will stock-picking remain crucial to the overall portfolio returns over the next six to 12 months, or should one just buy and hold as most stocks have seen a sharp fall?

Retail investors must follow a disciplined approach of systematic investment plans to weather market volatility across cycles.

Over the past two-three years, retail allocation to Indian equities has been on the rise, but still significantly lower than what it ought to be.

Individual stocks will have their own share of ups and downs, but a portfolio approach will help a better risk-reward outcome.

What has been your investment strategy amid the recent market correction?

We have been advising investors to raise their equity allocation since valuations are reasonable and growth outlook is good.

Over a longer period of time, equity should outperform most asset classes. We have seen many domestic-driven sectors showing early signs of recovery – be it credit growth, automobile sales, or real estate enquiries.

Our top sectors at this point in time are financial (ICICI Bank, State Bank of India), automotive (Mahindra & Mahindra, Maruti Suzuki India), consumer (ITC, Godrej Consumer), and technology (Infosys, HCL Technologies). We also like domestic tourism, with hotels as an attractive bet for the next two/three years.

Borrowing is becoming costlier. To what extent will this dent demand and affect corporate earnings? Have you tweaked the earnings forecasts for India Inc for 2022-23?

In a very short period of time, central banks across the globe have turned hawkish. Every bank is front-loading the rate hikes to tame inflation. Hence, we have seen higher rates come in quickly. A large part of the rate hikes has been done and inflation can moderate in the second half of 2022. Talks of a US recession will prevent hikes beyond a point.

The impact of the recent hikes on demand and corporate earnings will be limited in the Indian context. The leverage of India Inc’s balance sheet is low. A correction in commodity prices, normal monsoon, and approaching festival season sales should support earnings growth in the near term.

The positive surprises in growth can come from rural India with a well-spread monsoon. Earnings cuts could be in global commodities, where the price fall has been severe in recent times.