Capital Goods: ETMarkets Smart Talk: Banking, Capital Goods Among Top 5 Sectors With Better Earnings Visibility: Ashutosh Bhargava

“Sectors, where earnings visibility is relatively better, include banking, capital goods, energy, utilities and automotive,” says Ashutosh BhargavaHead-Equity Research and Fund Manager at Nippon India Mutual Fund.

In an interview with ETMarkets, Bhargava said, “Domestic-oriented sectors seem more attractive at this stage; sectors and stocks where earnings meet expectations and margins are intact would earn a performance premium relative to the rest of the market. Edited excerpts:

Benchmarks are down double digits from their highs. How should investors manage the current market volatility?
We are in an unprecedented macro environment when it comes to macro and global markets. Along with the rest of the world, we also had a dream run in the markets for 18 months until October 2021.

Since then, markets have fallen due to multi-year high inflation, rapidly tightening global financial conditions, mounting growth concerns, and more.

So, from a period when nothing could go wrong until October 2021 to the concentration of negative events since then, this has been a complete turnaround for global markets.

Our market corrected as part of a broader global environment of risk aversion, led by strong FII outflows. After this correction in the global market and our market, many of these negatives could be in the price, but the macro/global market environment remains uncertain.

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There are many possible scenarios, so the best thing an investor can do is diversify.

Diversify in terms of asset allocation as well as sectors within equity exposure. It’s unlikely to be easy, but if an investor has the right asset allocation and expectations of expected future returns, they shouldn’t worry about market volatility. Volatility is here to stay.

US markets also corrected from the highs. What kind of impact do you see on stock markets around the world? Do you see new outflows of capital from India as well as renewed risk aversion?
As I mentioned, there aren’t many historical parallels with the current market environment. We haven’t seen a supply-side inflation shock of this nature for at least several decades.

Investors did not see a period of quantitative tightening and rising rates together. At the same time, private sector balance sheets are in very good shape globally.

Valuations have already corrected all over the world and in terms of PE ratio, most markets are trading below their last 5-10 year valuation average.

So it’s not that the negatives haven’t already been taken care of. War, inflation and interest rate uncertainty are still there, so volatility will remain high.

When visibility becomes a challenge, there is usually a downgrade in valuations. This has been happening for several months. There are arguments on both sides, so it is difficult to have a very strong view of global markets.

In this sense, it is very difficult to say that despite unprecedented and unprecedented sales by FIIs, there will be no more FII releases. However, it won’t be too rash to say that the bulk of the sales might be late.

What would change this pattern where FII would return to India again in a meaningful way is anyone’s guess! I wouldn’t want to risk that guess because it’s not an easily predictable or controllable factor.

The Modi government ends its 8-year term on May 26. Many stocks became multibaggers during the same period and benchmark indices doubled during the same period. What are your views, do you think the government has laid the foundation for robust market conditions?
There are many structural advantages in favor of India. First, household and corporate balance sheets are in very good shape. This allows them to leverage and increase consumption and CAPEX together.

The government’s formalization efforts are already bearing fruit, as evidenced by the collection of taxes and the financialization of savings. The intention and actions of import substitution and increasing the share of the manufacturing sector in the global economy are very clear.

Also, the lenders are in good shape so even that is not a problem. So there are cyclical challenges, no doubt. But at the same time, many structural factors are favorable.

However, more than top-down and macro factors, it is exciting to see strong micro or sectoral improvements. Due to formalization and other factors, competitive intensity in many sectors has diminished.

Thus, the pricing power has also increased. This can already be seen in the rise in corporate profits relative to GDP. I’m more excited about the potential earnings cycle relative to India’s otherwise strong macro structural story.

After the recent drop, do you think the Indian market has entered the buy zone?
Valuations have certainly corrected in our market. However, they are close to the average of the last 5 years and a little higher than the averages of the last 10 years.

At the same time, interest rates are rising, so although value has started to emerge across all sectors and sizes, it would be unwise to say that the Indian market has entered a buy zone.

The risk/return ratio is more balanced here after correction, but the return expectation must be measured in a perspective of 1 to 2 years.

Additionally, more focus needs to be placed on upside opportunities where price value gaps are emerging rather than guessing whether we have entered a genuine buy zone from the perspective of the leading indices. We would never be able to time these things perfectly.

Which sectors look attractive after the recent fall?
Sectors with relatively better earnings visibility include 1) Banking, 2) Capital Goods, 3) Energy, 4) Utilities, and 5) Automotive. Domestically oriented sectors seem more attractive at this stage.

Separately, sectors and stocks where earnings meet expectations and margins are intact would enjoy a performance premium relative to the rest of the market.

Valuations are quite reasonable for so-called value stocks and among large sectors such as financials.

Additionally, after this corrective value has started to emerge across all sectors, it may be prudent to focus on the GARP framework and put more energy into bottom-up stock picking rather than bottom-up stock picking. sectoral.

Recently, a global investment bank underweight IT. Which sectors are you underweight in an uncertain global environment?
We were underweight technology as a space in most portfolios. We also have a significant underweight to consumer stocks in consumer staples as well as the discretionary side, mainly due to high valuations.

What is your view of money? What is its impact on FII flows?
In an environment of general strengthening of the US Dollar against most global currencies, the RBI has done an excellent job of smoothing the depreciation of the INR. So far, it’s been a very orderly writedown given the complex global backdrop.

We have a slight depreciation bias on the INR as we believe India’s current account deficit could remain elevated, in part due to strong domestic demand at a time of tightening global financial conditions .

We expect only a small orderly depreciation and nothing dramatic as India’s foreign exchange reserve position remains very comfortable.

After the ferocious releases we’ve seen so far, we can expect a moderation in FII releases in the future. However, for flows to turn positive, we need the Fed to reduce hawkish risks and downside risks to emerging market and Indian earnings to fade. It may not happen in a hurry.

INR by itself may not be a deciding factor for FIIs to decide to back off. We can be optimistic, but we cannot assign material weight when it comes to our investment decisions.

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts belong to them. These do not represent the views of Economic Times)