Expect low single-digit return over 12 months: Mahesh Nandurkar, Jefferies

Foreign investors are willing to look through the near-term weakness in the economy, says Nandurkar

As the markets prepare for India Inc to unveil its June 2021 quarter performance over the next few weeks, MAHESH NANDURKAR, managing director at Jefferies, tells Puneet Wadhwa in an interview that helped by a low base, corporate earnings growth this year should be strong -- about 30 per cent for the Nifty -- but that’s already factored in by the markets. Edited excerpts:

Do you think there is a bubble building up across most asset classes?

Bubble is a strong word. I don’t think there’s a bubble. The equity market price-to-earnings (PE) multiple has gone up quite a lot -- almost two standard deviations above the mean. But at the same time, the risk-free rate is low across the globe. In the Indian context -- our favourite 'Bond Yield-Earnings Yield' valuation metric -- is close to historical averages. This implies that there’s no major market euphoria as such. But yes, we need to be aware that this high liquidity induced low yields will not remain at this level forever.

How are foreign investors viewing India as an investment destination?

Foreign investors are willing to look through the near-term weakness in the economy and focus on the expected economic growth recovery. India’s macro appears solid in the context of the expected pick-up in the housing market, which is likely to drive economic growth improvement. For EM markets to perform, we need the dollar to remain stable-to-weak. Given the high fiscal deficit and excess liquidity in the US, currency trends should remain supportive.

 Most experts see inflation as transitory. What could change this view and are the markets prepared to deal with the shock?

Yes, that’s correct. The global view is that the US inflation will be transitory. And this will enable the Fed to calibrate the ‘taper’ very gradually. But some possible strong labour data points can question this hypothesis. If this risk were to pan out, there will be some turbulence in the global and Indian equity markets. Those potential market dips should be bought into. But it’s a dynamic world and we need to keep evaluating the global and US trends constantly. 

How long do you see the global central banks remaining accommodative?

We have already seen some central bankers, such as Canada, the UK, initiating the taper. Some EM central banks have started hiking rates, but the key would be when does the Federal Reserve or European Central Bank (ECB) start unwinding. The US Fed has already started talking about the taper. However, the markets don’t wait for the actual event to happen. Both equities and bonds typically react about a couple of quarters in advance. The same should happen in India, as well. The excess liquidity in the reverse repo market and the Reserve Bank of India’s (RBI’s) tight control on the 10-year yields should begin to ease in the second half of 2021 (H2-CY21). Our base is that Indian 10-year yields will jump 50-75 basis points (bps) over the next 6-12 months.

Can the Indian equity markets now see a timewise/price-wise correction?

Our 12-month Nifty target is 16,300 and we expect low single-digit returns from the market over the next 12 months. This view is based on our expectation of slow unwinding of excess liquidity globally and also in India. This assumes that the market P/E multiple de-rates by about 10 per cent, which should be offset by underlying corporate earnings growth. While the market as a whole may not deliver very high returns, certain segments of the market can definitely deliver much better returns.

What are the risks that the Indian markets are ignoring right now?

The key risk for the Indian markets, I believe, will be the change in global sentiment -- sudden inflation scare, dollar strengthening, supply-driven crude oil shock etc. Potential domestic risks to watch out for will be assessing true asset quality concerns. Most large banks have sufficient cushion against potential non-performing loans (NPL) spikes due to the Covid impact but the same cannot be said about all smaller banks and non-banking financial companies (NBFCs).

Which are your overweight and underweight sectors?

We remain optimistic about India’s economic growth recovery helped by the housing market recovery. The long-awaited housing market recovery should eventually lead to the broader capex cycle recovery. Consequently, we remain overweight on property, industrial, metals, and top-tier banks. We also like select public sector undertakings (PSUs) and utilities from a value perspective. Consumer goods – both durables and non-durables -- and telecom are our underweights.

What is a realistic assessment of corporate earnings growth in FY22?

Helped by a low base, corporate earnings growth this year should be strong -- about 30 per cent for the Nifty -- but that’s already factored in by the market. The key will be tracking the pace of economic recovery and what’s the exit rate for Q4FY22, which will set the base for FY23. We expect over 15 per cent corporate earnings growth in FY23.