'Banking sector a good long-term bet despite expensive valuation'

Market was expected to enter a new zone as soon as the US election was over and the next biggest trigger for the equities will be another set of stimulus promised by the US and European Government, says SATISH MENON, executive director at Geojit Financial Services, in an interview with Swati Verma. Edited excerpts.

Market is back at record high levels. Your view. Also, what will be the next triggers for the equities?

It was expected that the market will move to a new zone as soon as the US election was over. This was because new investments were put on-hold during September - October, waiting for the election outcome and US Fed view. The outcome was much better than expected leading to unleashing a high amount of funds. It is a shot-in-the-arm as the economy and equity market are roaring under the benefit of a solid rebound in economic activity and earnings. The next biggest trigger is another set of stimulus promised by the US and European Government, which is expected by December or January.

Financials have witnessed a strong upside after falling sharply in the first half of the fiscal. Do you see this to continue? Should one consider it for long-term investment?

In the last quarter, we have been advising to add exposure in the banking sector as valuation was at seven year-low, and uncertainty from moratorium was reducing. The Supreme Court’s verdict on the moratorium case is expected to be in line with the government’s proposal and market expectations. It is reasonable to expect a judgement safeguarding the interests of the banking sector and minimising the burden on borrowers. Today valuation-wise they are not that cheap, but it is still attractive supported by a bounce in credit growth and reporting of lower NPAs than feared two quarters back. It is a good value buy for the long-term.

Mutual funds are continuously witnessing outflows. MFs pulled out a massive Rs 14,300 crore from equities in October, making it the fifth consecutive month of withdrawal. Your take on the development. By when do you expect the recovery?

Well, it is more like a fear, a herd mentality as the market has recovered faster regaining all its losses post the eruption of covid-19. Now the outlook has improved much better. Next year is likely to be much better supported by a rebound in the economy, earnings growth, easy money supply, and further fiscal and monetary supports in the world. This outflow can reverse soon with new money coming from investors when they see the economy is bouncing back and corporate earnings come back to expected levels.

What's your view on defensives such as IT and pharma sector?

These are the two Indian sectors that have developed a very high appreciation in the world. Today, it is considered as a high-quality service and product provider with high brand value. As their prices and valuation have re-rated, that should not be a stoppage, as further re-rating is expected given a better outlook for digital and pharma products, on a long-term basis.

Your overweight and underweight sectors.

We are overweight on IT, Pharma, Chemicals, Telecom, Consumer and Exporters and underweight on Construction, Infrastructure, Aviation, Hospitality, and Capital Goods.

The economy is showing encouraging signs of recovery. Companies' management commentaries have been quite promising in the second quarter financial results. Any estimates for Nifty earnings by March-end?

The market expects earnings per share (EPS) of about Rs 480 for Nifty50 in March FY21, which is flattish on a YoY basis. This is after factoring in the huge downfall in Q1. The result for Q2 was very encouraging with a strong bounce on a QoQ basis, which is likely to sustainable next year also. The market expects a strong bounce in earnings growth in FY22 with a growth of more than 30 per cent on a YoY basis.