Equities, a Buy on Any Correction In Prices…

The equities markets had seen the last major fall to the tune of about 15 % and after the subsequent revival, looks set to test lower levels in the coming weeks. The local market often mirrors the US market
developments. The recent gains in the market have been the result of a kind of moderation in the hostilities in Eastern Europe, and the perception that the discussion between Ukraine and Russia could
bring in some resolution to the situation. Apart from this, the announcement of the plans for merger of HDFC with HDFC Bank also helped the sentiments to a significant extent. But the fact is that the
markets may remain volatile in the immediate term due to some of the factors already mentioned, but beyond the immediate term there may be some pressures on the market due to high fuel prices,
spiralling inflation, and the likelihood of lower economic growth. Any corrective downward movement is an opportunity to invest into the market.

The FOMC stance is already well known, and the Fed is clearly in a tightening mode, with the first-rate hike having been effected already, and more hikes planned for the rest of the year. The statement from
the Fed Chairman recently reflects the thinking at the Fed that stronger rate action is required to control inflation. That may also mean half percent hikes. While RBI may be viewing these
developments abroad with interest, the domestic policy is almost always aligned to local realities and developments. Growth has recovered after the pandemic. But sequential growth has slowed down.
This is a cause for worry. Again, inflation has gone beyond the 6 % level, and this may invite rate action from the central bank. In the absence of rate action, the high inflation rate may choke consumer
demand and may result in margin compression for the corporates

The FII exit from the domestic market continues unabated. There has been only occasional sporadic buying by overseas investors, and this does not indicate any change in trend as such unless the buying
becomes more consistent and regular. Given the fact that almost US$ 30 billion worth of exit has already happened, and as the local market looks a good buy on long term fundamentals, it is only a
matter of time before the foreign buyers come back. But this may require certain conditions to be satisfied. Stable inflows may start coming in once the Fed policy and the US yields start showing signs
of saturation. This means that after another couple of hikes in the base rate, the further rate action would become more or less data dependent, and that would signal the end of an aggressive phase of
rate action. In the domestic market too, we need to have better clarity on rate action. It may also be mentioned here that the sequential growth rate has been declining in the last three quarters, and it
may still be on the same trend with very high oil prices. A positive growth trajectory is fundamental to sectoral performance.

The Emkay Equity Strategy notes that commodities shock may have negative implications, but the aggregate Nifty profits may be fairly resilient in a downside scenario, assuming that oil stays at US$100
per barrel, GDP growth lower by 100 bps, and the average US$/Rupee exchange rate at 78.00. Earnings resilience comes from the Big-4 sectors that will either benefit like Oil & Gas, Metals, or will see the least
or a negligible impact of higher crude and commodity prices on their growth and profit margins, which includes IT, Banks. There is scope for lower PAT in FY 23E to the tune of 30%,20%,10% in Auto, Cement
and Consumer stocks in the Nifty respectively. Therefore, at an aggregate level some of the negatives may be neutralized. The Nifty downside appears limited as both P/E and yield gap are below their
respective 10-year averages. Sectorally, Metals, Oil & Gas, Utilities, Telecoms, IT Services, and selectively Banks and Pharma may be preferred at this juncture. Though Nifty-50 profits saw a swift recovery post
the initial pandemic impact, the sequential profit growth now appears to be stalling, affected by margin pressures, weaker-than-expected rural demand and the last wave of the pandemic. The
expectations or forecast is like this – profit growth of >40% for Nifty-50 in FY22, and an FY23 profit growth of ~20% for Nifty.

The ideal approach to equity investing is to stick to well managed portfolios with stable and well-established track record of performance. Apart from mutual funds, opportunities offered by
portfolio management schemes and alternate investment funds may be looked at to position the portfolio for much higher returns over the longer time horizon.



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