Expect time-wise correction in market for next few months: Nirav Sheth

The domestic markets have been stuck in a range for some time now, with Nifty trading just shy of the 16,000 mark. Amid this backdrop, NIRAV SHETH, CEO- Institutional Equities, Emkay Global Financial Services tells Saloni Goel in an interview that key risk for equity markets, especially emerging markets, is a counter-trend rally in the US dollar. Edited excerpts:

With indices at an all-time high, how do you see the market trend from here on?

Markets are trading at about 21xFY22 and about 19XFY23E earnings at the higher end of their trading range. Earnings racing off a cliff have some upside risk and low-interest rates will support relatively high valuations. We expect markets to time correct for the next several months and sector rotation to be the dominant theme.

What are the key risks for the equity markets right now?

The key risk for equity markets, especially emerging markets is a counter-trend rally in the US dollar. The US economy is firing and a reset of interest rate expectations can dislocate the markets. Domestically, inflation risk can overwhelm RBI's dovish monetary policy. Apart from this, a newer variant of Covid and a slow pace of vaccination can delay growth recovery.

FPIs investment trends have been quite volatile. How is their mood vis-a-vis India?

We believe that FII outflows in April and May were primarily driven by an unexpected surge in Covid cases and the subsequent downgrade of economic projections. As we stand, India seems to be doing better even on vaccination coverage. IPOs of mega-cap tech companies will also see a substantial interest from FIIs, especially after higher regulatory risk in Chinese tech companies. Overall, we are constructive on the outlook for FII flows here onwards.

Do you think Zomato and the new-age tech companies can create wealth for investors?

New-age tech companies benefit from network effect and a near oligopolistic structure. Without commenting on specific companies, a portfolio of such companies will do extremely well even accounting for some failures. Investors will have to have a significantly longer time horizon as these business models will take several years to scale up to size and profitability.

What are some of the sectors that you are overweight and underweight on?

We are overweight on financial services, capital goods, consumer discretionary and materials and energy. We are underweight on software and healthcare.

Red flags have gone up on the small-cap space. Now, with the market turning choppy, is it time to exit small-caps and take cover in large-cap names?

The small-cap index has rallied hard but it is not unusual for it to preempt a cyclical economic recovery. Secondly, small-cap stocks cover numerous sectors where underlying growth and competitive dynamics are very different. So, generalisation will not work. Despite the rally, numerous sectors and companies can offer mid-teen returns over the next several years.