Led by US, global markets should see happy FY22: IIFL's R Venkataraman

EPS growth is likely to be largely reflected in market returns, hence expect 10-12 per cent broad returns in the current financial year, says IIFL Securities chairman

The recent movement curbs, especially in Maharashtra and Delhi, have kept the markets nervous over the last week. R VENKATARAMAN, chairman, IIFL Securities, tells Puneet Wadhwa in an interview that he will use a correction in the markets to buy stocks and sees a 10-12 per cent return in FY22. Edited excerpts:

What’s your outlook for the markets in FY22?

The Nifty is at 21x FY22 earnings per share (EPS) and looks good to hold its rating from a 12-month perspective. In the short run (the next six months), there may be hiccups like high interest rates in the US, need for the rupee to correct, high commodity and crude prices, and the second Covid wave. But once we are past the second wave, the economy should resume its onward momentum and be able to take the other factors in its stride. Led by the US, global markets should see a happy FY22. Hopefully, the vaccines will see the back of the virus. FY22 could be another major year for equity raising through initial public offers (IPOs). We see a substantial pipeline of transactions, which are at various stages of execution.

Should investors temper their return expectation?

EPS growth is likely to be largely reflected in market returns, hence expect 10-12 per cent broad returns in the current financial year. While we expect smaller companies to be hit more by high input costs, they will sport greater top-line recovery momentum as the confidence returns in the economy. Mid-and small-cap indices should outperform.

Are the risks to the downside more as compared to the triggers for an upside?

At present, there is limited downside risk to the markets — the second Covid wave being the main threat. Currently, global markets are still in a risk-on mode, though some money has shifted back from emerging markets (EMs) to the US and some other developed markets (DMs). More attractive yields in those regions have pulled back capital, plus the US has come out swinging with huge fiscal stimuli focused on infrastructure. As US valuations stretch, money flows will head back towards EMs over the medium-to-long term.

As a strategy, would you look to sell on a rise or buy on a dip?

We would like to buy on a dip. We expect the rupee to weaken versus the dollar, as have other EM currencies. This trend is likely to continue for the next six months. The Indian economy may progress in fits and starts, and the relatively slow progress of vaccination in India means that we will be slower to recover compared to the US.

Your sector preferences…

Against this backdrop, information technology (IT), exporters (chemicals), global cyclicals (strong beneficiaries not only of high commodity prices but also rupee depreciation), and the insurance sector will do well. We also like private banks, as they shall see loan growth acceleration and lower non-performing assets (NPAs) than currently provisioned for. We are underweight on domestic cyclicals like cement and pricey sectors like fast-moving consumer goods (FMCG), paints, etc.

How are you interpreting the recent statements from global central banks?

The US Fed and the RBI have both committed to easy money conditions and until normalcy (employment in the US and financial stability in India) is restored. However, as rates rise in the US, and the US Fed only controls the short end. Thus, capital outflow risk does become significant for EMs, especially a commodity importing EM like India.

What are your expectations from the March 2020 quarter earnings?

We think commodity companies will see large upgrades -- companies like Tata Steel, Hindalco, etc. Consumer electricals and autos may see downgrades, as weak demand conditions imply limited ability to take price hikes for offsetting significant raw material cost increases. FY22 looks good for IT and private banks.

How much of the commodity price surge is the financial markets pencilling in right now?

The commodity price surge is not really a headwind for the markets. The rise of commodities and higher interest rates have resulted in preferences shifting from high growth names to lower equity duration sectors. In aggregate, since this is due to a collective global economic rebound (and in more liberal pro-business policies in India as seen from the Budget) plus monetary and fiscal stimuli, the yield surge is being taken its stride by the markets. It would have been worrisome had higher yields not been accompanied by greater growth visibility, but that is not the case.

What about retail participation in the equity markets?

Retail investor participation is likely to increase, not only because equity as an asset class is easily available because of awareness, mobile apps, and internet availability. There is a large retail segment that has just entered or is waiting to enter equites. Retail investors have become smart and do a lot of research before taking the plunge into the markets now. There is a lot of asset diversification as well.