'What investors want is stability'

'Hope they don't tinker around with capital gains tax in any way.'

Hemant Kanawala, Head -- Equity investments for Kotak Life Insurance, tells Prasanna D Zore/Rediff.com about his expectations from the Budget.

Are markets easing out before the Budget? How are you seeing at the recent market selloff?

I don't believe this fall has anything to do with the Budget. Market is aligning itself to the US Fed going for normalisation of monetary policy. And they (the US Fed) have already started tapering the excess liquidity they have been infusing into the global markets every month since start of the pandemic.

There is worry about this liquidity taper and hike in interest rates, but to what extent they (US Fed) will do it remains to be seen. But the pace (of rate hikes) is expected to be faster than previously expected by the market as containing inflation has emerged as a major concern for the US Fed.

That is leading to correction across global equity markets. In fact, in the current month, India has done better than the US market.

Would say that the steep post-Covid rally seen in the Indian equity market was a function of the liquidity glut coming from the US or were investors chasing growth as well in India?

Markets rise because of two factors. One is earnings recovery and the other is valuation.

India showed strong earnings recovery post Covid. Earnings growth from FY20 to FY22 will be almost 50 per cent.

If you look at the markets before Covid hit (the steep sell-off between February-April 2020), the market has risen 50 per cent from 12,000 to 18,000.

That way, earnings have supported this rally, but the valuation of the Indian markets were supported by global liquidity. Finally, valuation is a function of interest rates.

Although the US was the leader in providing this liquidity, but it was also infused by the Euro zone and Japan; every central banker infused liquidity. These funds flowed into risk assets that can offer best returns.

If the US Fed starts increasing interest rates at a faster clip, will it impact valuations in emerging markets like India?

I don't think so. If you analyse history, you will find out that investors look at value. What investors will look at is in which markets growth is impacted the most (because of rise in interest rates).

India today, fortunately, on the macro-side is very well placed. Our forex reserves are ample, inflation is under control, indicating strong macro stability and that will help India's (equity) valuations.

Even when the dollar index (an index that measures strength of the US dollar against a basket of major global currencies) shot up to 98-99, the Indian rupee did not see a significant fall in its value compared to other emerging market currencies which were under lot of pressure.

While we may face some hiccups in the shorter-term, long term investors would continue to value India better than other emerging markets. India will see lesser withdrawal of funds compared to other markets.

We are still in the midst of the third quarter earnings season. How do you look at FY22 earnings panning out for the Indian corporate sector?

We expect 30 per cent earnings growth for this financial year (FY22 which measures earnings between April 1, 2021 to March 31, 2022). Going forward we may grow at 15 per cent for the next two years (FY23 and FY24). This quarter is turning out to be in line with our expectation.

We have seen mostly IT and banks come out with their (third quarter) results; we have seen commodity pressures on consumer companies and that will continue for some time.

Going forward, the pressure on commodities is likely to ease and that will benefit the manufacturing sector. However, India being a huge consumer and importer of energy commodity like oil, high oil prices will remain a challenge we will have to deal with.

As of now, it doesn't look like we are deeply impacted by it (high oil prices).

If corporate earnings for FY23 are estimated to be half of FY22 earnings growth, how will that impact equity valuations going into FY23?

That (valuation) is already factored into the current price (of Nifty). The recent fall is due to the concern around hike in US interest rates and Fed monetary tapering.

One must realise that 30 per cent earnings growth can't keep happening forever. 30 per cent growth in FY22 was an aberration.

Investors are also not building that into their valuations. Let us see how earnings actually shape up in FY23. They can grow at 15 per cent or 20 per cent or 10 per cent also.

If earnings start disappointing (for FY23), then re-adjustment of valuations can happen at a faster rate.

So, 15 per cent (earnings growth) is expected in FY23. Let us see how it pans out in reality.

Has the market started discounting FY23 earnings now given the steep correction we have seen since January 18?

Yes. High growth stocks are even discounting FY24 earnings. Markets are always forward looking.

Given this growth scenario for FY23 and FY24, any sectors that will grow better than expected earnings?

I believe the government is focusing a lot on investment cycle; it is encouraging lot of sectors by announcing PLIs (performance linked incentives) for many sectors to boost manufacturing, they are also spending lot on infrastructure sector and housing. All these three sectors are getting boost from both the central and state governments.

I believe that in the last decade these sectors were neglected, but this decade will belong to these three sectors and the focus will always be on boosting investment cycles in these sectors.

Would you have any Budget wish-list for the finance minister?

Not many, just that they don't tinker around with capital gains tax in any way because what investors want is stability.

Tinkering around with stability is not good from investors' point of view. These days lot of government policy measures happen outside the Budget.

We would want to see what kind of fiscal consolidation government is looking at, and how do they plan to raise the resources and tackle fiscal deficit.

While lot of action happens outside the Budget, the Union Budget is an important document. It definitely gives an indication of the government's intent for the year ahead. The Budget offers a platform to the government to showcase to the world about its economic vision. From that perspective it becomes important.

What Fed action could really, really, disappoint investors?

Investors are expecting a rate hike in March.

As of now, they are tapering the balance sheet (reducing the quantum of bonds purchase from banks), but if they give guidance that they plan to go ahead with the contracting from May or June, then I think investors will be really disappointed.

While the direction is clear that the US Fed is in tightening mode, the pace at which it plans to do that is what will surprise or disappoint the market.

Markets will be keenly watching the pace at which Fed will taper bond buying and tighten interest rates.

What will be your advice for retail investors given the Fed tapering and tightening and geo-political tensions in the Middle East and Eastern Europe?

Simple suggestion would be to look at earnings potential of a country like India. We have seen crises worse than what we are seeing currently, but equities have always outperformed most asset classes in the long term.

Fortunately, India's earnings growth today looks very solid.

We are expecting 15 per cent earnings growth in the next two fiscal years and any correction in the market should be bought keeping this growth estimate in mind.

What kind of correction are you expecting?

As a benchmark, 10 to 20 per cent corrections are considered healthy corrections. 30 to 40 per cent corrections happen only during Black Swan events like Covid, etc. Otherwise, markets don't correct 30 to 40 per cent.

10 to 20 per cent correction is considered healthy and that can be bought into.