Retail investor participation in 2022 could slow a bit: Jigar Shah

Foreign flows into Indian equities have slowed against the backdrop of hawkish policies of global central banks and the possibility of a third wave of the pandemic in the country. JIGAR SHAH, chief executive officer, Kim Eng Securities India, tells Puneet Wadhwa in an interview that foreign inflows (into the Indian markets) could surge once the threat of the third Covid wave is over, and the path for economy/earnings recovery is clearer. Edited excerpts:

With the US Fed stance now clear, how do you see global financial markets playing out over the next year?

The US Fed policy action would be replicated by all other central banks, sooner or later. The signs of liquidity tightening and rate increase are palpable. Earnings forecasts are not fully pricing in the risk from higher interest rates and continued commodity price inflation. The wage inflation is catching up, too, which may build pressure on earnings across sectors, especially the service sector, which forms a bigger slice of the economy in India.

How do you see the Indian markets doing over the next 12 months?

Our Nifty50 target is 14,700, based on a one-year forward P/E ratio of 20x, a 10 per cent premium over the long-term average. Broad-based earnings growth could be challenging. There is a risk in both earnings disappointment and P/E derating. If the third wave of Covid infections is as bad as the second one, the market may get very polarised with a preference for blue-chips with low volatility. There are, however, many bottom-up opportunities and themes to consider for the long term.

Do you see stock returns getting more polarised?

Amid several uncertainties, equity flows would preferably get parked into sectors with stronger consistency and quality of earnings or specific catalysts/tailwinds. We continue to prefer IT services, telecom and telecom ancillaries, tractors, pharmaceutical/health care, and consumer businesses. Businesses with a specific focus and superior strategy on sustainability/ESG can witness growing investor interest and allocations (both local and global). Areas such as renewables, recycling, circular economy, green hydrogen, decarbonisation, and energy efficiency are likely to grow faster and companies championing these themes with innovative products/services will deliver superior growth.

Will the large-cap universe be a safer option now?

As extra liquidity in the market reduces, small-caps below $500 million in size can see some derating. Many stocks of firms in the $200-million to $2-billion range have undergone sharp correction from their highs, but there is more scope in case of an earnings disappointment. Select small- and mid-caps with high quality of governance, earnings, and no controversies can find a place in institutional portfolios. Large-caps, especially those with a value bias, are preferable at this stage.

There is a lot of expectation built in that India can be included in major bond indices in 2022. Do you see this materialising?

This is anticipated for quite some time and is perhaps delayed owing to the pandemic. If India is included in the global bond index, inflows could be $20-25 billion annually. However, bond investors will require a well-controlled fiscal deficit, low inflation, and stable currency. These factors remain dynamic, but inclusion in the global bond index will certainly be a positive and instil good overall discipline.

Are valuations and economic progress enticing enough for foreign investors to prefer India over other emerging markets (EMs)?

As of now, we are witnessing significant outflows on the lines of other EMs, but India has always been a favourite of foreign investors due to: a) size of the market and its potential growth, b) variety of stocks/sectors to choose from; c) several high-quality management with a track record of delivering solid financial performance and value creation. Foreign inflows could be lumpy and big once the threat of the third wave is over and the path for economy/earnings recovery is clearer.

Can retail investors’ enthusiasm for the markets continue at the same pace in 2022?

The retail investor boom was driven by the ease of technology and work from home during the pandemic. This coincided well with ‘easy liquidity’ and ‘easy returns’ in the past 12-15 months. It has been across asset classes, including cryptos and commodity trading. Retail investors’ participation in 2022 could slow down a bit as easy liquidity-driven ‘easy money’ trade is less likely to repeat, reducing the activity of short-term traders and speculators. Historically, the peak of bull markets attracted maximum investors and funds, and vice versa.

How do you see India Inc's earnings shape up?

The consensus earnings growth forecast is around 20 per cent for the next year and appears a challenging task. Downgrades may happen because there will be pressure from continued high commodity prices, wage inflation, and rising interest rates. All these could be passed on only with a lag. Additional trouble could come if the third wave (of Covid) materialises, slowing the credit growth and economic recovery and affecting asset quality.