Dalal Street Voice: Sectors expected to show earnings resilience are gaining strength: Mayuresh Joshi of William O'Neil India

Mayuresh Joshi, Head of Equity Research, William O'Neil India believes that the uncertainties on a macro scale across the globe mean that the adjustment shall continue from risk-on assets like equities towards safer haven assets to adjust the overall weights on FII Books.

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Mayuresh has worked as a financial analyst, investment banker, wealth manager, and portfolio manager for 16+ years and has extensive experience in the fields of investment banking, strategic alliances, business development, wealth and portfolio management.

In an interview with Zeebiz's Kshitij Anand, Joshi said that sectors, where earnings resilience is holding as of date are Capital Goods/Construction Equipment, Autos, while IT/financials/metals are showing some signs of consolidation. Edited Excerpts –

Q) Geopolitical events as well as expectations of solid tightening by the US Fed, have certainly fuelled a risk-off sentiment in the market. What is your take, and how should long-term investors view this?

A) Markets are gestating implications of this global news cocktail and corresponding consequences of waning global GDP growth, reducing the risk premium that equities markets enjoy.

The excesses that the markets were building in are now getting simmered down to more realistic assumptions.

The premise of sectoral rotation is focused on sectors that are expected to show earnings resilience is gaining strength.

The volatility associated with these events should settle down over the next few weeks. As the markets enter into a time correction phase, specific sectors exhibiting earnings resilience should be kept on the radar.

Q) What is your take on the December quarter earnings and what is the kind of projections you foresee for FY23?

A) December earnings have been decent though the strong underlying for most industries was the input cost inflation eating into the operating performance.

For FY23, the markets should deliver earnings growth in the range of 14-15%. But, due to input inflationary/supply chain pressures, operating performance might be muted in the first half with some optimism of recovery towards the second half.

Q) Last two months have been volatile how have you positioned your portfolio to tackle volatility amid external headwinds?

A) We have been extremely light over the past few weeks as evident signs of distribution occurring across diversified sectors and the broader markets are pointing to a clear sectoral rotation from high flying sectors to sectors where earnings shall be consistent.

The volatility in the past few weeks and our observations on the same are listed below:

a) With 57% of stocks below 50-DMA and 38% below 200-DMA, it is evident that technical damage is deep.  It won't be easy to repair this damage, and the market might need some time to do it.  

b) Relative strength has been feeble. Only 23% of stocks have relative strength of 50 or higher, indicating poor relative price performance.  
 
In lieu of those mentioned above, wait for the market to show some strength.

Let the leading stocks/sectors reclaim key moving averages and multiple ideas to break out from early-stage bases, along with improvement in relative strength.  

Q) Inflation might certainly become a pain point for the economy as well as RBI – what trajectory do you foresee for the rate in the next 12 months. How should investors position themselves to tackle the change?

A) RBI has projected a 4.5% rate for the next financial year. Now, external headwinds are more or less due to concerns about imported inflation and how the crude prices might move and ultimately settle down.

Food inflation with expectations of a record RABI output would ensure that the overall inflation basket, esp. CPI inflation should be contained through inflationary pressures from crude.

Its second-round effects on higher transportation/logistic costs and input costs of crude derivatives moving higher might be an outside risk. Therefore, if inflation pressures persist contrary to RBI expectations, what stance would it take then.

Though data is still evolving, it should not be sticky, leading to structural issues. Even if we witness imported inflationary concerns, RBI moves on liquidity management, and any interest rate tightening would not be in the same trajectory as the developed world.

A worst-case scenario might be a 50bps hike in the current financial year with the Central Bank using other tools at its behest to curb excess liquidity prevalent in the system.

Q) Small & midcaps have clearly outperformed in the past 2 years with handsome margins – how should investors view the space in FY23?

A) Small/Mid caps outperformance as the market turns results in major corrections as these spaces are where exits happen in the first and fastest mode. We believe that one has to be highly selective in both these spaces.

Q) If someone is running a portfolio with deep red – what should be his/her strategy before the financial year-end. Hold positions or exit stocks. If exit then which stocks/fund should the investors exit from?

A) The first step is to see the positioning and weightage that one holds in specific sectors/stocks. The market is now transitioning from a period of tremendous liquidity-feeding runaway growth to a scenario of liquidity being clawed back/inflationary concerns emerging and Global GDP growth waning, leading to more realistic earnings growth across sectors.

Sectors, where earnings resilience is holding as of date are Capital Goods/Construction Equipment, Autos, while IT/financials/metals are showing some signs of consolidation.

In our view, the relative strength of FMCG/Realty/Pharma indices is slipping into the underperforming quadrant.

Q) FIIs clearly remain net sellers but retail investor force is something that is keeping market float at every support. How do you see FII activity in the near future? There is a saying that when FIIs exit – it is usually the best time to book profits?

A) FII's have been adjusting their flows vis-a-vis how the global markets are behaving and a precise adjustment towards dollar-denominated assets, adjusted for ETF flows which benchmark against these indices and weightage that emerging markets carry in their comprehensive book.

The uncertainties on a macro scale across the globe mean that the adjustment shall continue from risk-on assets like equities towards safer haven assets to adjust the overall weights on FII Books. However, they shall be selective in sectoral allocations.

Albeit, Domestic Institutions/SIP flows have remained extremely strong, offsetting supply pressures from FII's to a large extent, and that should continue providing resilience and support for our markets.  

Q) The recent selling was largely seen in high PE stocks which low PE stocks did not see much sell-off. Can we say that smart money is now moving out of high beta counters and richly priced stocks?

A) It has been evident that money has moved from high-value PE stocks towards value. When markets readjust their earnings trajectory, and some sectors hold strong earnings momentum vis-a-vis global macro/local macro/micro news flow, capital flow and readjustments shall be natural phenomena.

Also, as normalized returns can be expected from the overall markets, high PE stocks generally lose flavour. Their valuation stack upstarts look unattractive for the sheer inability to maintain excessive earnings growth as witnessed in the previous cycle.

So, to put in a gist, our take at MarketSmith India is that post a corrective phase like the one we are witnessing right now brings about a Leadership change with new sectoral leaders and their leading stocks expected to emerge as potential winners in the next cycle.

Q) Govt has notified the first phase of the green hydrogen policy. What does it mean for markets and which companies are likely to get benefited the most? Also, does that mean that companies with high ESG ratings will be considered for investment by foreign funds?

A) It is a proactive step and reform process that the Government has initiated. The objective is well laid out.

The capital investments as envisaged/planned should ensure that India becomes a self-sufficient hub for consumption of the same but an equal amount of export opportunities emerging from the same.

Companies foraying into the same shall focus on ESG funds as renewable, and companies reducing carbon footprint shall remain high on their rankings.

(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.)