Dalal Street Voice: As interest rate go up in 2022 growth stocks could become less attractive: Deepak Jasani of HDFC Securities

Deepak Jasani, Head of Retail Research, HDFC Securities said that as interest rates go north, growth stocks could become less attractive especially if they fail to deliver on the high expectations of growth in top and bottom line.

A Chartered Accountant by profession, Jasani has broad-based domain expertise of more than sixteen years in capital markets. He brings remarkable insights across multiple verticals in the capital markets.

In an interview with Zeebiz's Kshitij Anand, Jasani said investors need to be careful in participating in stocks that have only promises/potential and are yet to deliver, and turnaround stories need to be avoided till there is a reasonable assurance of a genuine turnaround.

Edited excerpts:

Q) RBI maintained the status quo on rates in February and maintained a dovish stance which came as a welcome surprise for markets. What is the trajectory you foresee for rates in near future?

A) With inflation remaining high, the RBI may be forced to sooner or later start the process of raising rates and tightening liquidity, especially if the growth seems to be returning in the economy.

A lot of economists feel that the RBI has fallen behind the curve and in case the rate hikes are delayed, inflation may continue to remain high for longer than the RBI expects.

However, in case this is done with some forewarning and in a measured pace, the markets may not be unduly hurt by the rate hikes.

Q) Indian market picked up momentum post Budget after initial US Fed jitters stabilised. What are your views on markets for 2022? What will be next trigger for markets?

A) Indian markets seem to be fairly valued going by the Nifty EPS projected for the next few years. However, the worry remains as to whether the projected EPS will be met or undershoot, like in the recent past.

Also, the interest rate hikes across the globe could mean lower valuation ascribed to equities and a reduction in FPI flows from abroad.

However, in case Indian macro and micro continue to perform, India will still remain the most attractive market among emerging economies.

More stability in local politics and in the economy, stability in crude prices, and fewer geopolitical shocks could be the triggers for the Indian market in 2022.
 
Q) Budget 2022 was focused on boosting growth – do you see sectoral rotation taking place? Which should long-term investors focus on?

A) Interest rates seem to be on the way up due to the higher-than-expected FY23 fiscal deficit and no provision to enable inclusion of Indian Sovereign bonds in global bond indices in the latest Budget.  

This may lead to a shift in investments from expensive sectors to cyclical. Capital Goods, Metals, and Cement are the apparent beneficiaries of the Budget.

Q) Which theme will dominate markets in 2022 – value of growth? We saw a lot of liquidity chasing many mid and small-cap stocks in 2020-2021 to tap growth. What are your views?

A) As interest rates go north, growth stocks could become less attractive especially if they fail to deliver on the high expectations of growth in top and bottom line.

Alpha generating possibilities abound in the small and midcap companies that have adjusted well to the disruption seen over the past few years.

However, investors need to be careful in participating in stocks that have only promises/potential and are yet to deliver.

Also, turnaround stories need to be avoided till there is a reasonable assurance of a genuine turnaround.

Q) Crude seems to be on the boil. What is your call on the commodity market in 2022?

A) Crude oil prices have a lot of tailwinds currently due to the geopolitical issues and rebound in economic growth post the Covid-related slowdown.

However, the oil producers will be wary of too high a price in the face of Iran supplies likely to be available post the US Iran accord and the OPEC members wanting to benefit out of the current uprun in prices.  

 A shift to green energy could accelerate in case the oil price remains too high for too long.

Q) Given the government's focus on pushing CAPEX are there any sectors poised for re-rating?

A) Capital Goods, and Metal stocks could benefit out of the Govt thrust on Capex; however, one will have to watch the execution speed of the Govt and the areas of Capex to ensure that the listed engineering companies benefit a lot out of this promise.

Import threat remains omnipresent and the Govt’s thrust on PLI is likely to take some time before coming into effect.

Q) Any new age developing themes which investors can look at for next 2-3 years? And the ones which one can avoid amid high valuations?

A) New age companies whose business models are unclear or sketchy and businesses that require frequent fund infusion can be avoided. Also, the themes where the entry barriers are not large can be avoided.

The new-age businesses could see competition emerging from investors with deep pockets who want to offer a well-rounded experience or from new innovation whereby the core business moat gets threatened.

New age businesses came out with IPOs at valuations that discount the upside in the business of the next 5-7 years leaving little on the table for new investors.

Pricing in most new age IPOs was not in sync with the prospects of the company.

The fact that the IPO investors have been allotted shares at a much higher price than the last round of funding by PE/VC investors a few quarters back also leave a bad taste and IPO investors end up taking much higher risk than the so-called risk investors (PE/VC).

The high valuation has been aided by multiple rounds of funding by VC/PE investors who raise the valuation of the entire company by putting incrementally smaller sums at high valuations in each subsequent round.

Investors who put money in such IPOs should restrict the amount to be invested in each such IPO and keep a stoploss in terms of absolute loss per IPO if they do not have any medium-term conviction on the business prospects of the company.

Investing in such high-priced IPOs pays off only in times of bubbly market conditions; investors should keep this in mind.

Having said that themes like EV, Green energy, Digital are some which can be tracked by investors for investment provided the entry valuation is reasonable and not out of whack.  

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)