The gradual reduction in quantitative easing in the United States, India’s growth prospects, business investment and the revival of the banking sector are among the main triggers for domestic stock markets, according to Dhananjay Sinha, MD and Head – Strategist, JM Financial Institutional Securities. In an interview with Kshitij Bhargava of Financial Express, Dhananjay Sinha said he did not expect a strong correction while adding that any correction would only provide an opportunity to buy deep cyclical stocks. In addition, Dhananjay Sinha discussed what IPO investors should do to avoid listing losses.
What are the main triggers for the national stock markets in the coming quarters?
The main factors relevant to India’s market outlook are a) the trajectory of the gradual reduction of quantitative easing (QE) in the United States, b) India’s growth prospects against the backdrop of a potential slowdown in China and a peak after the stimulus-induced rebound in developed markets, particularly the United States, c) falling global commodity prices, d) potential recovery in business investment and e) resumption of growth in the banking sector. Profit growth expectations of 25-30% are quite aggressive and there are pockets of overvaluation allowing for low interest rates and excess liquidity. The key question will be whether the markets will continue to rise as they have since March 20 amid the above factors or will it be a gradual path going forward.
In the event of a strong correction, where should investors go to find a safe haven?
We do not expect a sharp correction. However, our sector preferences (shown below) should be good enough to withstand volatility. Deep corrections will provide an opportunity to buy deep cyclical stocks.
We have seen a lot of people promoting the hypothesis that India will benefit from the China + 1 strategy, is that taking shape in any form right now?
Over the past 4-5 years, several Asian countries such as Cambodia, Philippines, Vietnam and Bangladesh have benefited from deindustrialization and structural change in China towards a service-oriented economy and domestic consumption, resulting in departs from its former predominance of investments and exports. strategy. Trade disputes between the United States and China, particularly related to US sanctions and Chinese countermeasures, as well as technological fragmentation, lead to some diversion of FDI flows to other countries. The impact of the pandemic has also led to a reconfiguration of the supply of supplies to other countries. And the new RCEP trade bloc has boosted FDI investment in other countries, even as China continues to attract significant FDI. Under the theme of China Plus One, India won in the areas of chemical and pharmaceutical exports. However, there has not yet been a noticeable increase in FDI in the manufacturing sector with an average inflow of $ 1 billion to $ 1.4 billion per month, or one third of total FDI. Like India, several countries are offering political support to attract FDI to seize the opportunity of China plus one. We will also need investments in industrial infrastructure to realize the full potential
The flows of foreign investors have recently turned around, what is the main reason for this and could that change in the near future?
Portfolio flows to treasury stocks have been negative since April 2021, but overall positive. However, there has been a significant moderation since Q4 2020 and Q1 2021. The reason for the moderation is strengthening in the US dollar with increasing evidence of strong growth and rapid progress in the vaccination process in the United States. . In addition, rising inflation is fueling expectations that QE will slow down sooner than expected. We believe the QE cut will start in every other month with an estimated $ 15 to $ 20 billion monthly reduction in US Fed purchases. Longer term, as the Fed continues its normalization process, the US money supply-to-GDP ratio may decline from the current peak of 90% to 80% by the end of 2024. This would imply that portfolio flows to emerging markets would also normalize. . However, as this will be a predictable and fluid path, the impact on the market will remain fairly predictable.
We recently saw a list of discounted IPOs, is this a sign of concern for IPO investors, or just a short-term trend?
The strong interest in the IPO segment has been in response to the strong growth we have seen in the small and mid-cap space thanks to the participation of large retail investors. The recent downgrades are due to some correction in small and mid cap stocks. Here, our suggestion remains to pay attention to valuations and the strength of the corporate market.
Which pockets do you think are the most attractive at the moment?
We are positive on consumer sectors including stables, consumer discretionary, tech, and some pharmaceutical and industrials stocks. Based on the comparison of relative valuations, we believe the large cap segment should perform relatively better than mid and small caps. Autos will continue to be under pressure in the near term, but given the comfort of valuations, there may be good opportunities over the next 6 to 12 months.