'There are concerns regarding global factors that are making investors nervous. However, India has stood out in such times before as well.'
The evolving geopolitical situation in West Asia, rising oil prices, and a packed election calendar in the upcoming months have been some of the challenges faced by Indian markets in the past week.
As we enter the July-September quarter earnings season, Varun Saboo, head of equities at Anand Rathi Shares and Stock Brokers, shares in an e-mail interview with Puneet Wadhwa/Business Standard that earnings across various sectors are expected to align closely with initial projections.
The past year has brought significant fluctuations in foreign institutional investor (FII) flows into Indian equities. What is currently causing more concern among these investors -- global developments related to bond yields, increasing oil prices, or weakening fundamentals of the Indian economy amid these challenges?
Regarding FII flows, it's a combination of factors that are causing concern.
Firstly, the inflationary pressures in the West, resulting in higher interest rates and expectations of these rates remaining elevated, are a significant worry for investors.
Additionally, geopolitical issues such as the situations in Ukraine, Russia, and the recent Israel-Palestine conflict have further contributed to the prevailing negative sentiment.
The fallout of these developments is visible in the performance of the DXY (US Dollar Index).
A key observation to make here is the diminishing relevance of FII flows into Indian markets.
Despite FII selloff in the past two-and-a-half years of close to Rs 4 trillion, the Indian markets have displayed remarkable resilience.
How is the policy landscape viewed in India leading up to the state and general elections, particularly regarding retrospective taxation? Are they prepared for potential negative surprises, if any?
According to World Bank rankings, India is among the top five countries in terms of the strength of its legal system. Therefore, we do not consider this to be a significant concern.
We do not anticipate any negative surprises in this regard, and we doubt that FIIs are ready for such developments.
What are the top three concerns of your institutional clients regarding Indian equities, and how are you addressing them?
The primary concern that is arising pertains to valuations.
Most individuals agree that the Indian economy and the fundamentals of India Inc are standout, but valuations, on the whole, have become rich.
In our view, valuations are also a derivative of flows into the markets.
Due to the relentless flow of funds into domestic funds, particularly through systematic investment plans, we anticipate that valuation bands across companies will expand, and, earlier references wouldn't be meaningful for comparisons.
There are concerns regarding global factors that are making investors nervous. However, India has stood out in such times before as well.
Driven by robust domestic consumption, India remains economically insulated.
This time, the situation has been quite different. Currently, amid numerous concerns in global markets, the Indian economy has remained resilient.
How will the markets react to populist measures, if any, in the backdrop of state elections and the run-up to the general elections in 2024?
We do not anticipate any significant populist measures from the government.
There has been a lot of positivity on the ground across India.
The pro-development agenda of this government has been well-recognised throughout the country.
Have valuations now become enticing enough for investors to start cherry-picking? Which sectors are you bullish and bearish on from a medium-term perspective?
We can't definitively state that valuations are enticing enough at a broad level. It's time for bottom-up stock picking.
There are still interesting businesses available at moderate valuations.
We have a positive outlook on the information technology (IT), two-wheeler, and discretionary sectors, including hotel, multiplex, and cable, as well as select financial companies.
Does it appear that the worst is already priced in for IT stocks?
IT stocks have done quite well, especially in the midcap IT space.
We remain constructive on the sector; however, our optimism is selective, focusing on a few largecap names and a couple of midcaps.
Among the largecap IT companies, we have a strong preference for Infosys.
Additionally, we have been consistently bullish on Birlasoft and will continue to maintain this stance.
How do you anticipate the earnings for the September quarter playing out? Which sectors might deliver positive and negative surprises?
We don't foresee any significant surprises in the September earnings season.
Earnings across sectors are expected to be fairly in line with expectations.
We anticipate strong performance in discretionary sectors, and the IT sector is likely to demonstrate robust total contract values, providing visibility for future growth.
What is your view on small and midcaps at the current juncture? Do you have any stocks within these segments that you favour from a medium-term perspective? Also, which ones should investors avoid?
At the moment, we lean towards largecap stocks rather than small and midcap ones. There is still some valuation comfort available in the largecap space.
However, we have identified several small and midcap companies that we find attractive at current levels.
These include Emami, Zydus Wellness, Bandhan Bank, Cholamandalam Investment & Finance Company, Gabriel India, Sansera Engineering, Endurance Technologies, Birlasoft, VIP Industries, Safari Industries India, and Indian Hotels Company.
Feature Presentation: Rajesh Alva/Rediff.com
