FIIs may remain on sidelines for some time: Julius Baer's Ashish Gumashta

The markets enter the financial year 2022-23 (FY23) with a sense of caution, given geopolitical headwinds. ASHISH GUMASHTA, chief executive officer at Julius Baer India, tells Puneet Wadhwa in an interview that if the current geopolitical scenario changes relatively soon, and with expected growth of around 15 per cent in corporate earnings and some price/time correction in the markets over the past six months, he expects Indian equities to deliver a return of around 15 per cent in FY23. Edited excerpts:

Do you think Indian equities are a contrarian bet from a medium-term perspective, given the pessimism surrounding the geopolitical situation and rising oil prices?

Indian stocks are expensive when compared with the rest of the Asia-Pacific region. A contrarian strategy works best when valuations are cheap. It is now going to become more of a stock selection-based bottom-up-oriented market, the continuing trend of what we have seen over the past few months, and that trend is probably going to carry on for some time. The overall constructive view on Indian equities stays, aided by a positive outlook on economic growth and earnings momentum.

What are your return expectations from equities as an asset class in FY23?

Historically, equities have been the best asset class to beat inflation. If the geopolitical scenario does not prolong, and with expected growth of around 15 per cent in corporate earnings, and some price/time correction in the markets over the past six months, we can expect Indian equities to deliver a return of around 15 per cent in FY23. One can always generate some alpha, basis the right stock selection.

Do you think there are more headwinds for the markets in FY23 as compared to positives?

The two key headwinds for the markets have been the persistent inflationary pressure and the actions by global central banks, especially the US Fed. The markets have been absorbing and adjusting to incremental news flow surrounding these, and tapering of these challenges can lead to an improvement in overall sentiment. On the other hand, a prolonged period of the current geopolitical situation and elevated commodity prices can gradually start leading to demand destruction and weighing on economic growth.

So, what’s your stand on India?

Our global desk currently maintains an “overweight” rating on India with a Sensex target of 66,000, aided by the country’s macroeconomic stability, healthy earnings momentum, and with companies adopting newer technologies. Although the headwinds remain from inflationary pressure, the risk to earnings growth seems limited.

Is the panic over hike in rates by global central banks and the worry surrounding stagflation/recession fully priced in at the current levels?

Most global central banks will have to adopt a fine balance between addressing the challenges on growth and inflation front. While the initial action from the US Fed was less harsh than their initial plan, the subsequent rhetoric has been hawkish. Hence, the markets will continue monitoring the US Fed action as that will have implications for both equity and fixed income. In India, the Reserve Bank of India (RBI) has been much more supportive in terms of the policy stance. De-escalation in the Ukraine war and improvement in supply chains will help tame inflation, which will improve market sentiment, but only in the second half of 2022.

Is the worst of FII selling over?

FIIs may remain on the sidelines for some time. But we expect flows to resume once the headwinds minimise, hopefully towards the second half of 2022. India's growth story remains intact and the government’s ‘return to manufacturing’ theme, with a thrust on job creation and lower import dependency, will give a fillip to the Indian economy. The earnings cycle is also expected to remain positive, thereby aiding sentiment. Hence, India is expected to remain an attractive destination for FIIs.

Are market valuations more comfortable now?

Market valuations now seem to have moved closer, or are at just a small premium, to their historical averages, which definitely provides some comfort. The combination of healthy economic/earnings growth and decent liquidity support should help valuations sustain; they could get a leg up once the overall sentiment starts improving. We continue to maintain a constructive view on Indian equities, and would look at the intermittent corrections as opportunities to add positions.

Have you tweaked earnings forecasts for FY23?

The persistent inflationary pressure definitely poses a risk to earnings estimates, especially if prices were to remain elevated for a prolonged period. However, the impact of this is expected to be more pronounced on specific sectors/stocks, while it may not lead to significant risks at the headline index earnings level. While companies more vulnerable to input cost pressures have been gradually taking price hikes, the entire pass through may happen with a lag in the current weak demand environment.