{"id":127582,"date":"2022-05-31T05:22:59","date_gmt":"2022-05-31T05:22:59","guid":{"rendered":"https:\/\/fin2me.com\/?p=127582"},"modified":"2022-05-31T05:22:59","modified_gmt":"2022-05-31T05:22:59","slug":"growth-will-be-driven-by-investments-rather-than-consumption","status":"publish","type":"post","link":"https:\/\/fin2me.com\/business\/growth-will-be-driven-by-investments-rather-than-consumption\/","title":{"rendered":"‘Growth will be driven by investments rather than consumption’"},"content":{"rendered":"

‘A soft landing of the Indian economy would be a long-term positive for the equity markets.’<\/strong><\/p>\n

Markets have come off sharply this year amid the US Federal Reserve’s decision to shrink its balance sheet.<\/p>\n

Pressing ahead, returns will be driven by earnings growth rather than a valuation rerating, says Jyotivardhan Jaipuria<\/strong>, founder and managing director, Valentis Advisors.<\/p>\n

In conversation with Sundar Sethuraman<\/strong>\/Business Standard<\/em>, he says foreign flows may move to some of the under-performing markets within the emerging markets (EMs).<\/p>\n

How will a tighter monetary regime impact equity markets?<\/strong><\/p>\n

The rally in equity markets after COVID-19 was partly led by global central banks, especially the Fed, pumping in a great deal of liquidity into the system.<\/p>\n

The Fed balance sheet expanded from roughly $4.5 trillion pre-pandemic to $9 trillion.<\/p>\n

As the Fed shrinks its balance sheet, we think there will be some pressure on elevated equity-market valuations.<\/p>\n

In the next few years, returns will be driven by earnings growth rather than a valuation rerating, which was a feature in the past five years.<\/p>\n

Has the market now priced in the aggressive Fed rate hikes?<\/strong><\/p>\n

History shows that markets normally struggle in the early phase of a Fed hike, but recover and turn positive a year later.<\/p>\n

We think the market could behave similarly this time around, assuming the Fed is able to achieve a soft landing.<\/p>\n

This will cap the downside to the market.<\/p>\n

However, we expect the market to still worry about the probability of a stagflation, which caps the upside as well.<\/p>\n

We believe the market is in a consolidation range with a time correction until inflation starts to ease up.<\/p>\n

Will foreign portfolio investor (FPI) outflows from domestic markets live on?<\/strong><\/p>\n

FPI flows are partly a function of flows into EMs, and partly a function of allocation to India from EM flows.<\/p>\n

We think EM flows will be under pressure in the near term, given the rise in interest rates globally.<\/p>\n

India has been a strong outperformer, and money may move to some of the under-performing markets.<\/p>\n

Also, India’s valuation — relative to other EMs — is at very high levels.<\/p>\n

However, the longer-term story of India is intact, and investors generally acknowledge that India will be amongst the fastest-growing economies over the next five to 10 years.<\/p>\n

While we see near-term FPI outflows unceasing, we are positive about strong FPI flows as valuations become more reasonable.<\/p>\n

Do you think there is a case for India’s valuation premium vis-a-vis other EMs to shrink?<\/strong><\/p>\n

India has always traded at a valuation premium to EMs.<\/p>\n

For example, on a price-to-earnings basis, the valuation premium on average has been at around 55 per cent.<\/p>\n

However, the current valuation premium at around 90 per cent is at an all-time high and will probably come closer to the mean.<\/p>\n

India will continue to trade at premium valuations, but current premiums appear excessive.<\/p>\n

Were you surprised by the Reserve Bank of India’s out-of-turn hike? Will it torment the equity markets?<\/strong><\/p>\n

The RBI’s move did not surprise us, but the timing did since the central bank did it between meetings.<\/p>\n

Given the elevated inflation rate, a hike was inevitable.<\/p>\n

This, of course, spooked the markets since the timing was unexpected.<\/p>\n

While rate hikes per se<\/em> are not good for the equity markets, a sustained high inflation is probably worse.<\/p>\n

We think a soft landing of the Indian economy would be a long-term positive for the equity markets.<\/p>\n

Supply-side disruptions have primarily fuelled price rise. How effective will the central bank intervention be in tempering inflation?<\/strong><\/p>\n

There are a few supply-side factors that will hopefully ease.<\/p>\n

The first is the Russia-Ukraine conflict.<\/p>\n

The second is supply bottlenecks due to the China lockdown. The economy is still very resilient.<\/p>\n

Being mindful of full employment in the US, inflation will remain elevated unless the economy dawdles.<\/p>\n

This is where the central bank policy will play a role.<\/p>\n

How have the January-March quarter earnings been? How will a rise in inflation in commodity prices influence corporate earnings?<\/strong><\/p>\n

We think the inflation pressure will hit the April-June quarter more than the March quarter since a commodity price increase was felt only for a few weeks in the March quarter.<\/p>\n

The March quarter has so far been in line with companies signalling margin pressure.<\/p>\n

However, when we think of the overall earnings growth, a possible fall in margins for commodity users will be partly offset by a rise in margins for commodity producers.<\/p>\n

The overall downgrades will be mellow.<\/p>\n

Which sectors are you bullish\/bearish on?<\/strong><\/p>\n

Overall, we think growth will be driven by investments rather than consumption over the next few years.<\/p>\n

We are positive on capital goods, cement, and financial.<\/p>\n

We are also closely looking at automotive.<\/p>\n

We are negative on consumer staples, not losing sight of the valuation concerns.<\/p>\n

Do you expect strong inflows from retail investors and domestic mutual funds to persist, seeing that returns this year may not be impressive?<\/strong><\/p>\n

We may see some slowdown in retail inflows. However, we think a lot of investors have matured and kept their systematic investment plan money active in a downturn.<\/p>\n

The near-term impact may not be very sizeable.<\/p>\n

In the longer term, we continue to expect retail India to increase its share of equity investments, bearing in mind Indians are underweight on equities.<\/p>\n

Feature Presentation: Aslam Hunani\/Rediff.com<\/em><\/strong><\/p>\n

Source: Read Full Article<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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