'Risks to global markets could arise from central bank rate actions'

Market is building an earnings growth of 10-12 per cent for FY23, which seems achievable given the present earnings momentum and economic outlook, says Sanjay Chawla of Baroda BNP Paribas MF.

Global financial markets are now eyeing the outcome of the US Federal Reserve meeting on rates next week. SANJAY CHAWLA, chief investment officer – Equity at Baroda BNP Paribas Mutual Fund, tells Puneet Wadhwa in an interview that the Indian markets are building an earnings growth of 10-12 per cent for FY23, which seems to be achievable given the present earnings momentum and current economic outlook. Edited excerpts:

Did the sharp rebound in the markets since July take you by surprise?

The rebound in the markets coincided with the result season where most corporate commentaries were positive, particularly the ones dependent on domestic demand. This has re-assured the market that while there are global uncertainties, demand has seen a sharp rebound. Some of the global uncertainties could prove to be beneficial for India. Besides China+1 strategy, due to ongoing turmoil in the Eurozone, many manufacturing companies are looking at alternative manufacturing bases to East Europe. This offered us a great investment opportunity and realigned our portfolio.

Do you think the next big concern for the markets will be when the US Fed starts to wind down its balance-sheet that can trigger a liquidity squeeze?

The US' M2/GDP ratio remains elevated reflecting that it would take a long time for liquidity to normalise. Rate action may be the first step forward than a rapid wind down of the balance sheet, which could elevate short-term rates inverting yield curves. The risks to global markets could arise more from rate actions across major central banks and the consequent impact on global growth rather than from a liquidity squeeze. If a liquidity squeeze is indeed engineered by the Fed, it could only compound the problems hence it doesn’t appear to be the likely path forward.  

Flows to equity-related schemes have been thinning. Does that bother you as a fund manager that your investible corpus is shrinking?

Unlike the past when retail investors would panic when the markets would correct, during Covid times we had seen the resilience and maturity of retail investors to stay invested and increased allocation to equity as an asset class. SIP book continues to be steady and continues to grow. Financial assets, including MF investments, continue to be a relatively small proportion of the financial savings of Indian households, as compared to other comparable developing countries. With no social security and nuclearisation of the family, financial savings will be the only way to beat inflation. Hence, we continue to be optimistic about flows not withstanding some outflows in the short term.

To what extent have the companies got their pricing power back?

We are witnessing the pricing scenario working out differently between the premium and the mass segment. The premium segment has been able to pass on the price hikes on account of better pricing power; and strong recovery in urban demand. Mass segment, however, is still playing a catch-up game as far as pricing is concerned as demand is yet to fully recover. We expect these players to be in a much better place from H2-FY23 onwards as they get full benefits of correction in input prices as well as strong demand momentum in the festive season. Out of home consumption – hotels, retail and quick service restaurants (QSR) – are particularly doing well at this point of time. We expect strong recovery in other areas of discretionary consumption as well in the second half of the fiscal.

What are your estimates for corporate earnings growth in FY23?

The June 2022 quarter did see some miss in earnings leading to a cut in Nifty earnings for FY23. Market is building an earnings growth of 10-12 per cent for FY23, which seems to be achievable given the present earnings momentum and current economic outlook. The key thing to watch would be inflation trajectory going forward, and any possible impact to consumption demand led by higher inflation.