Not the time to cash out of this market rally: Nirav Sheth of Emkay Global

Equity markets are at record high levels with the S&P BSE Sensex hitting the 65,000-mark, and the Nifty50 surpassing 19,400 earlier this week. An investment strategy, said NIRAV SHETH, chief executive officer – Institutional Equities at Emkay Global Financial Services in an email interview with Nikita Vashisht, should always help to identify appropriately-priced sectors and stocks within a risk-return framework, without excessively obsessing about markets. Edited excerpts:

With markets at record highs, what strategy would you suggest to investors?

Markets will, over time, make new highs, just as gross domestic product (GDP) and profit scale new highs. Sometimes markets are ahead of fundamentals, while, at other times, they lag. An investment strategy should always help to identify appropriately-priced sectors and stocks within a risk-return framework, without excessively obsessing about markets. Cash-calls should only be taken, if at all, at extreme levels of valuations — we are not there yet.

WATCH | How sustainable is the market rally?

What's the road ahead for FII flows?

India’s macroeconomic fundamentals are resilient, with growth/inflation dynamics better than those of many developed markets (DMs). Given the structural improvement in current account deficit (CAD) dynamics, we expect the Rupee to remain fairly well bid. This, in turn, should reduce the required rate of return for investing in Indian equities. We expect FII flows to accelerate over coming several quarters. Sebi's FPI disclosures are mostly a non-event.

Will the US economy's final Q1CY23 GDP data keep the Fed hawkish for a long time? Should investors be concerned?

While the US economy has been fairly resilient in spite of rate hikes, inflation prints have mostly come in line with expectations. The recent re-pricing of the FED dot curve reflects better real growth rather than a high inflation print — this is good for equities in general.

What are your overweight and underweight sectors?

We are bullish on banks/NBFCs, autos and capital goods. We are also constructive on information technology (IT) and energy. We are underweight on consumer staples, consumer durables and commodities. The odds of a mild recession in the US are increasing; such a scenario playing out would allow the FED to reflate — especially if recession gets pushed out to early-CY24. If our hypothesis proves correct, the software sector will rally even if near-term valuations are shaky.

Expectations from June 2023 quarter numbers of India Inc?

We expect OMCs to surprise, while banks/NBFCs are expected to report in-line, albeit strong, numbers. The IT sector is likely to report soft numbers, with sequential constant currency (CC) growth in the 0-1.5 per cent range.

Can you elaborate your stance on the BFSI space?

Banks and financial services will do well in the long term as the underlying pillars of underwriting practice, especially with the GST/CIBIL/AA framework being fairly sturdy. Notably, the credit/GDP ratio in a credit-deficient country like India has been static since the last decade; but such ratios will look considerably different over the next decade or so. We like the private as well as the public sector bank spaces.