Dalal Street Voice: First 3 months of 2022 likely to be turbulent; investors must brace up, says R Venkataraman of IIFL Securities

R Venkataraman, Chairman, IIFL Securities Ltd is of the view that equities are likely to correct in the near-term mainly due to pressure from tightening from central banks as inflation surges. He believes inflation will worsen due to entrenched Omicron-induced lockdowns and supply chain disruptions.

Edited Excerpts:

Q) Yet another year of double-digit returns for investors as benchmark indices closed with gains of over 20%, beating fixed income instruments hands down. What is your view of markets in 2022?

A) Equities are likely to correct in the near term mainly due to pressure from tightening from central banks as inflation surges. We believe inflation will worsen due to entrenched Omicron-induced lockdowns and supply chain disruptions.

However, it is likely that inflation will cool down further; consensus estimates suggest inflation across major countries to cool down by 2QCY22.

Once inflation moderates, pressure from central banks will also ease and that will lift equity markets. But we will see a turbulent phase for the next 3 months.

Q) The US Fed has signalled 3 rate hikes in 2022 – how will it impact Indian markets, bonds, and currency?

A) Liquidity withdrawal will influence asset prices more than the rate hikes. Globally, central banks have infused $10trn. The impact of tightening will depend on how much and how fast it is done.

It is very difficult to reverse quickly as it might also result in rise in bankruptcies. So central bankers will be cautious.

India, being part of the emerging market (EM) basket, will get hit if normalization of liquidity is very sharp. On balance, there is less chance of abrupt moves after the next 2-3 months.

Q) What are your expectations from Budget 2022?

A) We expect the government to follow the fiscal discipline path i.e. lower fiscal deficit and borrowing from markets. We also expect bond markets and financial sector reforms. Government is likely to continue capital spending.

The construction sector will be in focus, therefore. We do not expect any hike in customs duties while expect some relief from excise duty cuts as fiscal position improves.

Rural handouts are also likely due to the lagging rural economy along with elections.

Q) Which sectors could be in focus in Budget 2022?

A) Infrastructure especially construction; agriculture due to rural stress and recent farmer unrest and elections; Pharma due to Covid surge and Capital goods sectors.

Q) Small & midcaps indices almost doubled compared to benchmark indices in 2021. Do you see a similar outperformance in 2022 from the broader market space?

A) Broad indices will initially underperform as the market feels normalization pressure. However, they will outperform later, especially midcaps.

Small caps are very expensive and in 2QFY22 their earnings growth has been subdued and we expect that trend to continue.

Q) Which sectors are likely to hog the limelight in 2022?

A) Capital goods, NBFCs (as economy, especially SME sector, recovers), Trucking and truck financing, IT (based on US strength), Metals (on global demand being unaffected due to more calibrated liquidity withdrawal).

Q) Any stock or sector that could turn out to be a dark horse of 2022?

A) Bharti Airtel: Another tariff hike could take the stock up to the next level. 5G may not be a major drain on funds.

Dabur India: Overall, FMCG stocks have underperformed but Dabur India could be an exception.

Q) What are your views on markets in terms of earnings recovery in 2022, as well as valuations when compared to global markets?

A) Earnings growth was strong in FY22 (2yr CAGR of 25%). It will moderate to 15% rate in FY23. India does look expensive but democracy, law and order, policy predictability, demographics, make it richer on valuations. That will continue. Especially with China's problems.

Q) What are your views on IPOs hitting D-Street? Do you think that there are general expectations IPO = quick money? How should investors look at investing in the IPO?

A) Quick money expectations have certainly fuelled IPOs. But, there is a long pipeline and these ebbs and flows where the odd IPO tanks are nothing more than par for the course. Investors should focus on business fundamentals and valuation.

(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.)