'Markets are pricing in quite a strong earnings revival'

Metals and mining, cement, infrastructure, industrials etc. are expected to perform well in March quarter earnings, Kumar said

The Indian economy is on the cusp of an uptrend, and as such, investors should utilise the short-term correction in the markets to buy cyclical stocks, NIRAJ KUMAR, chief investment officer at Future Generali India Life Insurance Company tells Chirinjibi Thapa in an interview. Edited excerpts:

How should investors approach the markets now?

Markets are, by nature, unpredictable and corrections are inevitable. But the key lesson is that corrections like these are indeed an opportunity to buy the stocks at lower prices and construct a long-term portfolio. In the current context, we reckon that the last bout of correction in the equity markets has been led by a confluence of factors such as resurgence in Covid-19 cases in India, rise in US bond yields, and the strengthening US Dollar. Despite the rise in yields, the overall monetary conditions globally will remain accommodative, which, coupled with stronger economic growth outlook, is a key positive for driving the equity market performance.

What are the key risks for the Indian markets?

The key risk for the Indian markets would emanate from non-delivery on the earnings growth expectations. At incumbent levels, markets are indeed pricing in quite a strong revival in earnings growth over fiscal 2021-22 (FY22) and FY23. Any disappointment on that front will have negative repercussions on the markets. On the Covid front, India seems to be more resilient and much better prepared to tackle the second wave than its western counterparts.

What has been your investment strategy thus far in 2021?

We are at the cusp of a cyclical uptrend in the economy and have positioned ourselves in the cyclical sectors. We have gone overweight on Banking, Financial and Insurance (BFSI), Metals and Mining, Cement, Infrastructure etc. We have also added a few stocks that are likely to be prime beneficiaries of PLI Scheme, Divestment beneficiaries.

What about defensives?

As we have seen in the past, in a typical risk-off environment, the traditional defensive sectors such as information technology (IT), fast moving consumer goods (FMCG), Pharma are considered as safe haven bets. However, we would urge investors to play the cyclical rebound in the economy.

What are your expectations from the March quarter earnings?

Prima facie, the March quarter earnings will obviously look good on a year-on-year (YoY) basis, owing to the weak base. On an absolute basis as well, we believe we could have yet another strong earnings season. The nominal growth rates will start looking better, as we have seen price hikes across sectors/products. So, while there could be overall moderation in margins because of rising input costs due to surge in commodity prices, the bottom line will be aided by better revenue growth.

Sectors such as Banking and Financial (though will recognize the non-performing assets for the past three quarters and thereby will look optically weak on asset quality), metals and mining, cement, infrastructure, industrials etc. are expected to perform well. On the other hand, autos and FMCG are likely to see margin headwinds due to surge in commodity prices.

What can investors expect from the markets in FY22?

Going forward, we expect returns to track earnings growth. Since we believe that we are at the cusp of an economic upcycle, we expect the earnings recovery momentum to gain further strength and thereby expect the markets perform reasonably well.

Broader markets have outperformed in the last one year; do they have more steam left?

Broader markets have indeed played a catch-up in FY21, with Nifty Midcap and Nifty Small delivering 98 per cent and 122 per cent returns, respectively, in comparison to 68 per cent for the Nifty Index. However, we have to keep in mind that the mid-and small-caps are coming out of a nearly three-year bear market. Going forward, we expect them to further catch-up and outperform the large-cap indices.

How should investors approach upcoming IPOs?

We would advise investors to be extremely selective in these IPOs. While we understand that some of these IPOs are concept stocks and thereby will command premium valuations, the historical financial performance and return ratios still do not justify the valuations at which these IPOs are hitting the markets. On the contrary, we have several listed companies with long history of execution, which are trading at significant discount to the valuations of some of these IPOs.