Emerging markets to find favour
The macro issues of high inflation and the consequent hike in interest rates appear to be peaking out. For the whole of last year and since August 2021, global equity markets faced issues of inflation, supply chain disruption, high freight costs etc and then the consequent rise in interest rates by Central Banks. These are expected to get reversed, which should support risk assets like equities going forward.
Emerging markets (EM) have better growth, lower inflation and less sovereign debt
A roller-coaster 2022 year marked a unique culmination of economic stress globally, driven by war-covid-led supply chain pressures at the beginning of the year to higher inflation, tougher US Fed and sustained rise in interest rates throughout the year. The developed countries riding on easy money (liberal monetary policy of the past) faced the inevitable consequent music of rake hikes with possible economic and business contraction. Indian markets also witnessed a wild ride last year which tested investors’ patience.
A volatile market environment should be treated as an opportunity for investors
Equity market volatility over the last few months has got exaggerated by weak global noise such as the inflation scare, much rumored US recession, the Europe energy crisis, and extreme volatility in currency markets. The turmoil in Europe will continue, driven primarily by uncertainty on energy issues while the US may not outperform the way it did in the past decade. The Chinese economy is expected to grow at just over 3% this year as per recent IMF forecasts, due to its zero covid policy and crack down on excessive real estate lending.
Equity Outlook – Navigating inflation and war
Recent equity market volatility is driven by many factors such as inflation and expected the US interest rate hikes, prolonged Russia-Ukraine conflict, supply chain disruptions as well as deserved correction of excess valuations in new-age tech businesses. The resurgence of geopolitical tensions between Russia, NATO and Ukraine has contributed to market angst in recent weeks. Global supply chains are still recovering from shocks triggered by the US-China trade war and COVID-19. Looking beyond the obvious areas like oil and gas while considering geopolitical dynamics reveals significant Russian leverage over global and especially western supply chains.
2022 Equity Outlook
2021 has been a great year for our AIF & PMS Funds – we had a return of 108.8% & 91.2% respectively in CY21 as against 30.1% for BSE 500. Our 3-year compounded returns (CAGR) in AIF are at 37.5% v/s 17.8% for BSE 500. The strategy of owning sustainable growth, capital efficiency and cash flow generating companies at reasonable valuations have paid off well in terms of relative outperformance to the market. More importantly, our stock selection across small and mid-caps have exhibited resilience during market falls.
Demand or growth is firing across all sectors and coming back to pre-covid levels
We are entering a phase of strong corporate earnings cycle and expect corrections in Indian markets will be short lived and not very meaningful. Demand or growth is firing across almost all sectors and coming back to pre-covid levels. This will lead to strong corporate earnings growth in the 2nd half of FY22 and also for the full year of FY23. We expect value including the likes of capital goods & engineering, utilities, manufacturing sector, select PSUs will continue to get recognised in terms of relative undervaluation. Incidentally, earnings of capital goods companies are at cyclical lows and can improve significantly as capex cycle picks up.
Market Outlook – Equity Market
Equity market rally is spreading and is becoming even more broad-based, as reflected by small cap index touching all time highs. Several companies in small and mid cap space that have been long mis-appraised and undervalued, are finally getting recognised. Despite COVID environment, we saw remarkable recovery in corporate earnings in 4th quarter of FY21 across sectors like autos, cement, technology, textiles, specialty and commodity chemicals. Steel in metals basket reported super cycle earnings driven by global price recovery. Engineering and capital goods showed clear signs of rising order book and indicates beginning of capex cycle recovery.
Outlook 2021 – A year of recovery & renewal
Last year will go down in history books as a year of extremes in equity markets across the globe – from panic and despair to markets climbing wall of worries with a sharp rebound and renewed optimism. Equity market precedes economic reality is once again proved with ground level recovery lagging market rally. We have begun to witness significant month-on-month improvement across economic data, Covid recovery cases in India as well as corporate earnings. Several high frequency data are showing improvement consistently – whether it is number of e-way bills generated, electricity consumption, railway freight volumes or car & house purchase registrations – all have picked up. In general, equity market has rightly been focusing beyond short-term demand issues and seems to be factoring-in fast approaching normalisation across many businesses.
India equity market view & Investment strategy
We are living in an equity market world, where reactions are typically sharp swift and short lived. The sharp fall leads to panic formation leaving scope for bargain buying. This is exactly what has happened over the last few months. We at Roha Asset Managers are not surprised by this untimely rally and our investment strategy of staying invested in quality mid-small caps helped recovery since March lows. After all, in the history of pandemics, equity markets tend to decline sharply and then recover.
NBFC Crisis & RBI Dilemma – “To repair a broken tap, or to fix a faulty pipe, that is the question.”
A Non Banking Financial Company (NBFC) is a company whose primary business is to lend loans and advances to the often credit starved sections of the society. The sector consists of two categories of companies, ones that can accept deposits from the public and ones that cannot. It is further classified as per the type of lending it facilitates – from infrastructure to a commercial vehicle to a loan for a small venture.
Investment in Agriculture sector – “better placed in pandemic times”
As the year 2020 unfolded, stock markets and the world economy have been gripped by COVID 19 pandemic. Although China has almost recovered, the rest of the world is unsure of the end and the economic impact still remains unfathomable for the most. Never before the world has witnessed the current standstill and without any doubt majority of sectors will face significant heat at least for the immediate future. In this article, we assess India’s Agriculture and allied sectors as a broader theme for investment to navigate these turbulent times.