Dalal Street Voice: Top 6 golden themes to track this SAMVAT 2078: Neeraj Chadawar of Axis Securities

We maintain our ‘Overweight’ stance in equity. However, we believe it is time to review the entire portfolio and recalibrate it with the initial target allocation, which will help in bringing down the overall portfolio risk, Neeraj Chadawar, Head - Quantitative Equity Research, Axis Securities said in an interview with Zeebiz’s Kshitij Anand. Edited Excerpts:

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Q) The market seems to be shaky ahead of Diwali, but with 30% rally already seen in the Nifty50 – what is your view on the market?

A) The Indian benchmark Index Nifty has given stellar returns of more than 140 per cent from the pandemic low last year.

The Indian economy has recovered sharply as the COVID 2.0 gradually waned with a pick-up in the vaccination drive.

With new hopes and confidence in the economic recovery, the benchmark Nifty has advanced quite some distance and touched an all-time high of 18,477 on 18th October, which stands 49 per cent higher than the pre-pandemic high.

In the last year, returns were broad-based, primarily on account of better participation witnessed across stock categories as well as sectors that were relatively narrow in the pre-pandemic years.

The pandemic year has translated into better profitability for the Indian corporates led by cost rationalization practices and pent-up demand.

Cumulative and rolling net profit of the NSE 500 universe for the last 4 quarters has touched an all-time high with loss-making sectors, turning positive and significantly contributing to the net profitability.

Moreover, the return on equity (ROE) for the broader market is improving after a muted performance for several years.

Overall, the Indian market has entered in an earning’s up-cycle with an expectation of more than 20% CAGR growth in the Nifty’s earnings in the next two years.

With faster economic recovery on the cards, more cyclical sectors are likely to join the rally with the expectation of higher government spending moving forward.

The market may not deliver stellar returns from here onwards as it has delivered in the last year, so in that regard, one needs to tone down expectations from the market.

However, we are constructive on the market on a long-term basis, as the outlook for the market continues to remain robust. We believe the style and sector rotation is a key strategy to generate alpha moving forward.

The markets may see heightened volatility in the near term on account of higher crude prices and rising concerns over inflation, which could challenge the margins for the companies.

Apart from that, the talk on the taper in the US market has increased, which could put a short-term pressure on the FII flows.

Q) I am sure everyone would be celebrating this Diwali as most portfolios have turned green. But what are your expectations for Samvat 2078? What should be the investment strategy?

A) Samvat 2078 now looks much brighter and more promising. This Diwali has brought festive cheers to many businesses after prolonged standstill operations and/or underutilized capacities owing to the lockdown-led restrictions.

It seems more probable that the growth will revive sooner with higher economic activities as it can be inferred from the high-frequency indicators trends.

SAMVAT 2078 will be a year of balance sheet leverage, led by significant improvement in corporate profitability.

Cumulative and rolling net profit of the NSE500 universe for the last 4 quarters has touched an all-time high with the loss-making sectors turning positive and significantly contributing to the net profitability.

We are constructive on the long-term perspective of the market, so our strategy is to stay invested in the market.

Based on the economic and market development, we are bullish on the following themes that could deliver solid returns in SAMVAT 2078:

1) The small-caps and mid-caps are picking up steam and balance sheet leveraging is likely to play out in 2022 with an improved outlook on return ratios and profitability.

2) Housing and banking will be major themes to watch out for in 2022 on account of their improved outlook and current lower interest rate regime.

3) The infra sector is an emerging theme as the government augments its spending in this space moving forward.

4) Digital and cloud will continue to remain major long-term structural themes.

5) The demand for home improvement has bolstered and continues to be robust in 2022.

6) Travel and tourism stands to be a more promising theme, which have further gained momentum post a pick-up in the vaccination drive.

Q) FIIs are selling at a time when the Sensex and the Nifty50 hit fresh record highs. What seems to be worrying FIIs and is it a sign of caution, which retail investors should take note of?

A) FIIs are selling not only in India but in all the major emerging markets ahead of the Fed meeting, which is scheduled in the first week of November.

The short-term direction of the FII flows will further depend upon the outcome of the Fed meeting, as market participants are expecting the Fed could start tapering from November onwards, which could be a negative for the flows in the emerging market for the short term.

Based on the positive economic outlook and the expectation of the double-digit corporate earnings, participation from the FIIs is likely to increase going forward as the economic condition are emerging positive with the pace of vaccination drive.

Q) The September quarter earnings remained a mixed bag. What are your views on the FY22 earnings expectations?

A) Earnings so far are a mixed bag, where IT reported a good set of numbers, while financial performance for consumer companies is below expectations so far and margin pressure was visible in the space with inadequate price hikes vis-à-vis raw material inflation.

We are yet to see the demand trend going forward and price hikes are expected in some pockets to offset rising costs. Earnings from the banking space are encouraging, led by the robust loan growth and improved net interest margin (NIM).

Overall, we are constructive on the FY22 earnings expectations as the demand is robust in the market, but margins pressure is a key risk in the near term.

The input cost pressure is not going to go away quickly, so adequate price hikes to offset the input cost pressure and the demand scenario sustaining are the key trend to watch out for in the near term.

Q) We have seen a strong rally in the small and midcap space and now that the tide seems to be taking a cautious stance – do you think high beta stocks could come under pressure?

A) Small and mid-cap companies tend to grow faster than the large-cap universe in an economic recovery scenario, so these companies are expected to see strong earnings growth going forward, which will be further supported by a lower base.

From the last two months, the quality theme is back in focus, as the market focus has slightly shifted towards sustaining returns.

We have also noted that even in the mid and small-cap space, quality stocks have outperformed the non-quality stocks by a significant margin.

Moreover, this divergence is quite significant in the small caps as compared to the large caps, indicating that the allocation will increasingly shift towards quality stocks across the board. In conclusion, attractive opportunities continue to remain in the small and mid-cap space.

Q) What should be the asset allocation for investors for SAMVAT 2078?

A) We maintain our ‘Overweight’ stance in equity. However, we believe it is time to review the entire portfolio and recalibrate it with the initial target allocation, which will help in bringing down the overall portfolio risk.  

Further, the equity market is likely to be the best performing asset class for the next 1-2 years. And asset allocation and sector rotation will be crucial to generate outperformance in 2022.

While exposure to equities should not be reduced, focusing on quality and bringing down portfolio risk through specific sectors should be a strategy going forward.

Q) Which sectors are likely to lead the next leg of the rally?

A) Value and quality have been the best performing themes in the last six months, while the growth theme has been the laggard. The performance of the quality bucket has picked up in the last two months and it has emerged as one of the best performers.

There are interesting plays in the life insurance, or in the private banking space that can generate good compounding returns.

Since with the pace of economic recovery, the government spending is likely to be higher in the second half of the current fiscal year, the economy-linked sectors will be the key watch out going forward.

Q) Do you see another double-digit correction in the rest of FY22? And, do you think that could have an impact on SIP flows, which crossed the Rs 10,000-cr mark in a month.

A) The market trading at an all-time high has resulted in higher volatility as well. India VIX is trading at 18 levels. However, the current levels are much below the long-term VIX average of 22, indicating a limited market downside.

The broader market would continue to gain momentum if VIX manages to settle below LTA. However, any sharp increase will signal a short-term negative for the market.

All the equity markets across the geography have run-up due to the massive liquidity, while return back to pre-pandemic levels with the withdrawal of liquidity in a calibrated way is a key factor to watch out for.

However, this may be a short-term negative for the market, but the market will continue to remain constructive in the hope of economic growth and the double-digit earnings expectation.  

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