Markets to consolidate over the next three-six months: Sampath Reddy

Multiple headwinds in the form of an aggressive US Fed rate hike and geopolitical developments have brought the near secular stock market rally since March 2020 to a halt. SAMPATH REDDY, chief investment officer, Bajaj Allianz Life Insurance, tells Puneet Wadhwa in an interview that the markets will give positive returns incrementally by end of the year, provided there’s no further deterioration in the geo-political environment. Edited excerpts:

Do you expect the markets to undergo more time-wise and price-wise correction going ahead?

Global headwinds and rural slowdown have stopped the one-way rally of the last 18 months resulting in removal of some excess from the markets. The anticipated rate hikes by the US Fed, elevated crude oil prices and rising geopolitical risks, can result in near-term volatility and correction. In addition, slowdown in rural demand and rising inflation are near-term headwinds. It is expected that this uncertainty is only a passing phase and structural growth levers led by infrastructure spend, industrial capex recovery, and huge untapped demand, remain intact. We are positive on India's growth story and expect markets to consolidate over the next three-six months. Markets will give positive returns incrementally by end of the year, provided there’s no further deterioration in the geo-political environment.

Your sector preference? 

We are positive on Banking & Financial Services (BFSI), Pharma, Industrials and Consumer Discretionary sectors. With economic recovery, credit growth will gradually pick-up and asset quality issues will be largely behind us. Valuations of most of the top-tier banks are below their long-term average and hence look attractive. With economic recovery, we expect the capex cycle to also gradually recover, led by public infrastructure spending. Though valuations appear to be high for industrial sector companies, it would be a good opportunity given the earnings for these companies to accelerate. Pharmaceuticals and consumer discretionary sectors are also attractively priced.

Your advice to debt market investors? 

While the RBI is keeping the interest rates steady for now, with a dovish outlook, the broad consensus is that RBI too would slowly unwind some of the monetary measures taken around COVID. In the anticipation of this interest rate hike by the market, yields have already moved up in the last couple of months. Bond markets have also witnessed substantial volatility in February amid tightening global financial conditions due to inflationary pressures. The higher-than-anticipated borrowing by the government has also added to the hardening of the yields, thereby impacting debt fund returns in the last couple of months. We believe some of these factors that have led to recent rise in yields to settle down in the next few months, and offer good returns from then onwards. 

Estimates for FY23 corporate earnings growth? 

Despite the recent correction, valuations are still quite elevated. Corporate earnings have been a positive surprise amidst the pandemic. In FY21, we saw India GDP contracted by 6.6 per cent but Nifty EPS (earnings per share) grew a healthy 18 per cent, against earlier expectations of around 10 per cent contraction in earnings growth. Despite the multiple COVID waves, the earnings for FY22 have not seen any significant downgrades and are on-course to deliver about 25 per cent growth. In spite of the strong earnings base, FY23 earnings can grow at about 18-20 per cent.