Earlier than expected Fed tapering, hike in interest rates, rising bond yields, overvaluation scenario and tepid results among other events are undoubtedly spoiling party for equity investors, believes Rajiv Kapoor, Vice President of Trustline Securities.
According to him, stock markets could see a bumpy ride in the upcoming weeks due to several factors that still remain a concern.
However, fundamentally nothing has changed drastically for the domestic equities other than profit booking due to overvaluation and slowdown in earnings momentum, says Kapoor. In an interview with Moneycontrol, he talks about the challenges markets are likely to face in the coming months. Edited excerpts:
Do you expect more selling pressure in the market given the consistent FII selling?
After delivering healthy returns of about 25 percent from January to November this year so far, markets are heading towards a lean patch with more volatility waiting ahead. Consequently, not as good as returns could be expected for a short time frame. With events like earlier than expected Fed tapering, hike in interest rates, rising bond yields, overvaluation scenario and tepid results are no doubt spoiling equity’s party. So, foreign investors have already pumped out Rs 87,000 crore odd Crores funds from domestic markets to invest in US markets.
Fundamentally, nothing has changed drastically for the domestic equities other than profit booking due to overvaluation and slowdown in earnings momentum. Amid FII selling streak, there is enough domestic liquidity as indicated by buying Rs 69,000 crore by DIIs & retail investors. However, continuous selling pressure may persist for some for time as they are looking for better risk-to-reward ratio elsewhere.
What are the top wall worries that the market is going to face in coming months?
Stock markets could see a bumpy ride in the upcoming weeks attributed to various factors that are still a concern for domestic equities.
Overvaluation: Rally in the benchmark stock indices in India have been driven by best-case scenario earnings and economic growth over the next two years. The Nifty50 index is trading at 22 times one-year forward earnings, which is well above its historical average. The market cap-to-GDP ratio is above 175 percent, well above the long-term average of 77 percent.
FPI muted inflows: Goldman Sachs and CLSA along with other brokerage houses have downgraded Indian Equities Market as well as overvaluation too have propelled foreign investors to hunt for investable opportunities elsewhere. Slowdown in China, geopolitical tension and regulatory crackdown have turned Chinese equities valuation reasonable. Thus, foreign investors are withdrawing India, and may be investing in China. Even though, retail participation has increased over the period, but it is not strong enough to hold on at the current levels.
Earnings upgrade cycle slows: Overvaluation scenario is further boosted by the September quarter earnings season that threw more negative surprises than positive ones. However, pent-up demand and gradual recovery in economic activities have helped companies to expand topline but not their bottom line on the backdrop of soaring input prices and high base effect.
Tapering by Federal Reserve: As Federal Reserve charting out its course post pandemic which includes reduction in bond buying. Consequently, it is impacting 10-years US treasury yields that it is fueling expectation of faster than expected hike in interest rates.
Inflationary pressure: Inflation is heating up as the economic is on strong recovery mode with demand coming back more than its normal levels fueled by trillions of dollars relief package, host of policy interventions at domestic front. All this has massively pushed supply chain infrastructure to a brink of collapse and coupled with soaring prices of all input materials with higher energy costs.
Strengthening US dollar: In recent weeks, the US dollar index has shown signs of increasing as it has blown past the 96 mark and is sitting close to one year high. Any further strength in greenback would likely to accelerate withdrawal of funds by foreign investors going ahead.
What is your view on Star Health IPO that is opening on November 30? Is it overpriced at issue price of Rs 870-900 per share?
Star Health and Allied Insurance Company is one of the largest private health insurers in India with a market share of 15.8 percent in FY21 (as per their RHP). Ace investor Rakesh Jhunjhunwala-backed Company has the largest distribution network, diversified product suite and strong risk management. However, the company suffered losses in FY21 and H1 FY22 on account of Covid-19 crisis coupled with negative cash inflows. Valuation-wise, Star Health seems overvalued in comparison to its listed peers.
How do you sum up the primary market that made records on several fronts? What are the most likely IPOs to hit Dalal Street in December 2021?
With IPO frenzy continues to prevail in the primary markets. According to estimates, 58 companies have cumulatively raised Rs 1,16,500+ crore in FY21 through primary market. However, Paytm has delivered flop listing show recently. Notwithstanding that interest in IPOs is still strong- euphoria still exists. As various next-gen businesses are coming in IPO mandi with different business models and commanding different valuations – rather extremely expensive but some are not even profitable businesses. So, with momentum and buzz in the market, stock could go up after listing but they may not be sustainable in delivering good returns to investors over a long period horizon.
Realty and consumption sectors outperform every other sector and benchmark as well as broader markets in November series. Do you expect this outperformance to continue in December series as well?
As far as consumption/FMCG sector is concerned, its gross margins are likely to remain under pressure year-on-year (YoY), while sequentially too. To tackle inflationary pressure, FMCG Companies have taken price hikes in the previous quarter and/or did grammage reductions. Further, price hikes could cost a loss in market share and volumes. Therefore, they have limited weaponry in their arsenal to protect their operating profit margins and will continue to remain under pressure in Q3 quarter. So, a similar outperformance cannot be expected from FMCG pack. Moreover, Revenue growth of major consumption players especially pick-up in discretionary categories, and out-of-home consumption, rural markets remain resilient on the back of good monsoon, higher crop prices are the positive triggers to go long on this sector.
Realty sector: The sentiment in the real estate industry continued to be optimistic and touched all-time high during November month. Therefore, outlook is also positive with recovery in economic activities and good pace in vaccination drive coupled with low interest rates regime, government support, and consolidation in the industry after RERA, incentives like stamp duty waiver/reduction, establishment of a Special Window for Affordable and Mid-Income Housing (SWAMIH), positive response from IT & ITeS companies as well as e-commerce and start-up are the key drivers ahead.
Real Estate Sentiment Index Q3 (July-September) 2021 cites that the real estate sector’s current and future sentiments have improved across all parameters in Q3 2021, on account of the economic recovery in the making. The current edition captures the rebound in stakeholder sentiments towards the residential and office sector as the second COVID-19 wave subsided. All these factors are indicating signs of a sustainable recovery in the real estate sector in upcoming quarters.
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