“I see no reason why Indian markets will not do well in the next 12 months from this Diwali to the next. I would think we have a good shot at Sensex rising 18% to 20% and hitting 70,000,” says Vikas Khemanifounder, Carnelian Capital Advisors

I see you are clearly making a new avatar. We understand what is in store for the equity markets in the next Samvat as it has not been too good to say so far. It has outperformed compared to the rest of the world. Do you like the term decoupling or do you think it is very difficult to go against the tide? How did India perform?
India has obviously done very well. Last Samvat, around the time of Diwali, there was a lot of hope and positivity. We saw the Fed raise interest rates significantly, the inflation numbers were surprising and the war in Ukraine was progressing. But despite all these factors, India held on and when most markets were down 20%-30%, India clearly outperformed.

Today whatever problem is happening elsewhere, India is not affected much. In fact, some of the factors are working for India at our stage of growth. If commodity prices fall, it works for India and India’s demand situation is not a problem. Some of the trends like China plus one are playing very well for the Indian manufacturing sector. All these things are only going well for India and are only incrementally more growth catalytic.

Economically, India has held up well, done well and tax collections are clearly coming up. That shows what is happening on the ground and in reality. Of course, we are in a global village. Global financial markets are interconnected so it will be very wrong to say that if something happens in the US, we will not be affected from a financial market perspective.

But the good part is that financial market implications can be short term but economic implications tend to be long lasting. Once the concern over the global macros for developed markets subsides over the next three to six months, things should return to normal in those as well and India should continue to perform good.

« Back to recommended stories

India should be in a structurally strong position globally but over the past year, the Nifty has underperformed by around 5%. Even at the portfolio level, it has not generated much returns for investors over the next Samvat. What should reasonably be expected from the equity markets in terms of returns? Can we see double digit returns?
Definitely. I had very high expectations about the Indian market from here, delivering 18-20% return for the next Samvat. There are three reasons; only, I think interest rates and inflation are peaking around the globe or could peak in the next two to three months or less. We know that the effect of the Fed base is playing out, commodity prices are falling and inflation or inflation expectations will tend to play out and that will give comfort to policy makers to move from the hawkish stance. Much of this is already in the price or the market. So in the next three to six months, they should be behind us.

Secondly, India tends to benefit from what is happening around the globe. We do not have a large share in world trade to affect us as an economy. Hence, earnings growth will largely remain except for some sectors such as commodities which may be affected. But it is not a very large part of earnings growth. So most of the big sector earnings will be good and I don’t see any change from that point of view.

Thirdly, I am very positive on the FPI flows. In the last 12-18 months, we have seen a huge number of flows going. Fortunately, domestic money came in. Such a large-scale sale had never occurred but the deal was still ongoing.

Going forward, we may see most FPIs withdrawing money from emerging markets as the Fed raises interest rates and tightens liquidity. The usual playbook is that when the Fed raises rates, emerging market currencies weaken and thus import inflation and economic growth begins to take a hit and expect the negative results, most pull of FPI investors money from emerging markets,

They return when the interest rates or the inflated cycle are higher. The FPI flows will return; it might take the first two months-three months or more, I don’t know that part. But I know if I take one year out, I have very high confidence in the FPI money coming back, especially towards India because India is one of the most promising markets which is emerging.

The weakening dollar will also start to play out and it works very well for currencies. If you take the combination of strong liquidity from the domestic players, strong liquidity from the international investors along with the stable and strong earnings environment, I see no reason why Indian markets will not do well in the next 12 months from this Diwali until the next one. I would think we have a good shot at Sensex rising 18% to 20% and hitting 70,000.

Diwali se Diwali takare you predicting 70,000 for Sensex next Diwali?
Yes, I think it’s a very likely scenario for the reasons I’ve mentioned. Now, whether it will happen before Diwali or around Diwali, I don’t know but in the next year, there is a high chance that we will see upside of 20%.

And when you see that growth is 18-20%, what should one ride on? In 2020-2021, it was IT. You are an IT bull but you also cut your IT position earlier this year. You said 2022 is the year of the banks. So, in terms of that 18% to 20% growth, what are you riding on?
Obviously, banking will do very well. We are at an early stage of credit growth. For the last two, three, four years we have been struggling with the NPLs and capitalization issues and I think everything is behind us. Fortunately the credit cycle has picked up. Most of the banks are growing between 18% to 20% of their books and the rising interest rate environment is helping them in terms of margin expansion. So I see that this environment will remain very strong in the coming years. I think this year itself, from this Diwali to the next Diwali, the entire banking basket would do well.

The second is the automotive sector, which after a period of four to five years with no demand or little growth, is starting to grow. After the IL&FS crisis, the pandemic came, there was a chip shortage and we didn’t really see any growth coming in the whole sector. The sector also looks very positive and valuations are reasonable, not expensive. So, that can definitely be looked at.

Third, we’ve seen an investment cycle, a capex cycle picking up across the board especially in the manufacturing side, the China plus one strategy is playing out. So industrials and manufacturing is a very large basket and across many segments and sub-segments, I believe that theme will continue. It’s a ten-year theme and I don’t see any reason why it won’t do well in the next 12 to 18 months, because whatever happens elsewhere is benefiting these companies and the rupee depreciation probably helps somehow.

Recent Chinese policy statements show that they are much more focused on the domestic economy. They are reducing theirs

in terms of export and in that sense, India will naturally get some benefit. So the manufacturing theme will probably catch on.

I’m not really sure about IT. IT corrections have taken place significantly, expecting a delay in demand but if you look at the order book or order wins of most IT companies it is a precursor or an indicator towards what impact it would have on the slowdown or recession in the US.

Any company that is placing an order knows that the US could go into recession but they are still placing an order that is higher than the one in the same quarter last year. It clearly tells us that demand is not the issue. IT is going through phases and in every structural cycle, every sector goes through phases. I’d say IT will do well too. Of course, in the short or medium term, the market may have different views and may not perform and deliver 18-20% return but the sectors that could deliver 12-15%, the sectors that would apply.

Are there opportunities in hit pharmacies, especially how the currency is shaping up?
Pharma looks attractive from a valuation point of view and if you have to get into it, it’s definitely a good sector because it’s a defensive sector. The valuations are corrected, expectations are very low but at the same time, there is no great visibility of the demand coming through. So, those haven’t happened yet. It can be disappointing at times, but considering risk-reward from a three to five-year perspective, pharmaceuticals certainly looks interesting, not just from a currency perspective but even in general.

Currency helps overall comfort but I think the currency will start to appreciate when the interest rate hits peaks in the next three to four months and rupee strengthens. I do not see this level sustaining over the next 12 months.

What is your ilbagger idea for the next Samvat? I see your holdings are top , L&T. Narrow it down to one stock.
There are many ideas and it is very difficult to pick one idea. Companies like L&T, ICICI Bank,

, all of which I think will be very well placed. We recently added Aditya Birla Capital and we think from this Diwali to the next Diwali too, it may surprise us and deliver better returns.

(Disclaimer: The suggestions, recommendations, views and opinions are those of the experts themselves. These do not represent the views of Economic Times)

Source link