According to Prashant Jain, Executive Director and Chief Investment Officer, HDFC AMC, the risk-reward of the Indian market has improved and the market today looks more fair than it was six-nine months ago. He believes the near-term outlook for the Indian economy looks stable and, over time, has the potential to significantly accelerate the country’s economic growth. The stock market veteran made these observations in a webinar on the mid-year review of the Indian economy and markets.
According to him, while consumption growth may show some moderation, exports and recovery in capital expenditure could help ensure decent growth in the near future. He expects India to be the fastest growing economy in this decade and emerge as the fifth largest economy before the end of the decade.
On interest rates, he thinks what we are experiencing is a normalization of the unusually low interest rates prevailing over the past few years. The rapid pace at which US yields have risen has stunned everyone. But, he feels, in India, since interest rates have not fallen as much as in the West, normalization will not be as fast. Therefore its effect should be less.
On how rising inflation would affect corporate profits, he highlighted how high inflation could augur well for some key sectors of the Nifty. About a third of the profit pool of the Nifty comes from banks. Today, two-thirds of bank loan books consist of floating rate loans, which will regain value once rates begin to rise. In fact, today, the share of floating rate loans in the balance sheets of Indian banks is higher than ever before and hence, the loan price will rise faster than deposits. Therefore, higher inflation, which in turn is leading to higher interest rates, will aid margin profitability of banks, according to Jain. In addition, high inflation is causing rapid credit growth. Along with this, the NPAs of banks are also very less.
Breaking down Nifty further, Jain pointed out that one-third to one-fourth of Nifty profits come from commodity-linked companies such as oil and gas, refining, coal and metals. Such companies are benefiting from higher commodity prices and higher refining margins. Higher commodity prices and higher inflation go hand in hand and hence this segment is also not going to be adversely affected by inflation, according to him. In addition, 15% of Nifty is in software services and 5% is in pharmaceuticals. This 20% of the market will benefit from rupee depreciation, which is likely to be on account of pressure on balance of payments in view of higher oil prices and strong FII outflows. So, the outlook on this segment also looks quite reasonable.
Valuation-wise, Jain said the bank stock multipliers are now below the long-term average as the sector has suffered the biggest brunt of selling by FIIs. He also gets some value after improving the P/E multiples of IT stocks. On capital goods companies, he believes that while stock valuations look expensive, their outlook is strong. Therefore, the sector may sustain higher multiples as profit growth could be significantly higher when the capital expenditure cycle turns.
He suggests that over the course of 3-6 months, one should invest in equities in tranches and take advantage of the sharp fall, if any. However, he says that one should invest only that money in the market which can be kept for a long period. Today, long term investors have a good opportunity to buy Indian equities at fair valuations as most of the uncertainties seem to be priced in.