Market may need new catalysts to rise meaningfully, says Jigar Shah

The rise in bond yields has created a flutter in the global financial markets, including India. JIGAR SHAH, chief executive officer, Kimeng Securities India, tells Puneet Wadhwa in an interview that there is a good possibility of a time-wise correction with a range-bound market. Edited excerpts:

What is your interpretation of the way the markets have moved up since March 2020 lows?

The rise in equities is a global phenomenon, backed by negative real rates, surplus liquidity, and low-cost/high-speed internet trading causing a lure of ‘easy money’. In hindsight, the good news flow, starting with a massive stimulus in the developed world, vaccine breakthroughs, and economic recovery in the past 8-10 months were conducive for a sharp bull run.

Earnings expectations are running high, especially with the positive surprise in the December quarter, where profits zoomed despite weak sales. All this is factored in the one-year forward price-to-earnings ratio (P/E) of the Nifty at 21-22x, which is at a significant premium to the long-term average.

The markets may need new catalysts/earnings drivers to rise meaningfully from here. There is a good possibility of a time-wise correction, with a range-bound market. If inflation picks up as the bond yield spike suggests, the price correction can also come up sooner-than-expected.

What are the key risks to the rally?

The three biggest risks are — a) the return of high Covid-19 cases and economic disruption; b) poor pace and depth of vaccination; c) a rise in inflation and interest rates. Of these, Covid-19 cases are an unknown factor. The pace and coverage of vaccination (in India) would be known over the next two quarters but it has been slow to begin as against other countries and despite India being an exporter of the vaccine. The inflation risk is quite material and needs some urgent fix before it can gallop. I am assuming that the US Federal Reserve (US Fed) and other big players will continue to support ultra-low rates and excess liquidity.

What’s your interpretation of the bond market? Should equity investor be worried?

Yes, it is a high risk on which equity investors must keep a tab. The extended borrowing programme of almost every country, high debt/GDP, and multi-year high fiscal deficits do not augur well for the equity markets as a rise in inflation can lift interest rates. Some evidence is already available in the form of bond yield rise. The equity risk premia had declined, taking up the equity valuation in 2020. That can reverse to some extent if interest rates climb up. Moreover, the benefits of an easy monetary policy for corporate earnings will also go away.

Several brokerages have been revisiting their strategy for India/Indian equities in their APAC portfolio. What’s your stand?

We do not have a much-nuanced view on this. Within our core operating area in the Asean markets, there are good recovery prospects in many countries and their valuations are more attractive than India. The attraction for India is due to some of its unique companies and the sheer market size, which will continue. Any big shift in the global supply chain investments in favour of India due to policies or geopolitical or other reasons will be significant and may bring a greater change in global fund allocations/view vis-a-vis other Asian markets.

With a possible rise in staff cost as pay cuts get restored and an uptick in commodity prices, is India Inc in for a rough ride over the next few quarters?

The September 2020 and December 2020 quarter earnings certainly surprised positively and demonstrated the resilience of the Indian corporate sector. A K-shaped recovery was written all over this. However, as the mobility of people normalises, factory production and supply chains pick up volumes, the overheads are bound to rise.

Do you see a margin squeeze as a result?

Commodity prices have shot through the roof. All of these cannot be passed on to customers and this will otherwise hit the fragile recovery. This is likely to reflect in the March 2021 quarter earnings of companies. While the year-on-year (YoY) low base will make it look good, the quarter-on-quarter (QoQ) margin squeeze seems very likely.

What is a realistic assumption for corporate earnings growth for FY22?

The Bloomberg consensus suggests earnings growth of 25-35 per cent for the Nifty stocks for FY22. It should be kept in mind that for the past few years, corporate earnings growth was quite tardy and what we are seeing is on a low base. Also, there are changes in the index constituents all the time as well. The more consistent earnings growth is in the software, private banks/ non-bank finance companies (NBFC), and consumer sectors, which should continue. The recovery can be led by cement, EPC/contractors, consumer discretionary, building materials, property, telecom etc.