Commodity Markets: ETMarkets Smart Talk: Commodity Markets Should Be Next to Correct: Dhananjay Sinha, JM Financial

Commodity markets remained extremely buoyant, supporting the synchronous surge seen in 2021, and we believe this increases the likelihood of an aggressive monetary policy response and hard landing, says Dhananjay SinhaMD & Chief – Strategist, Institutional Securities Ltd.

In an interview with ETMarkets, Sinha, who has more than 20 years of capital market experience, said: “Corporate earnings will suffer declines due to increasing cost pressure, and we expect future earnings for Clever 50 to 16-18% on FY23 and FY24. » Edited excerpts:

After a flat April, volatility should continue in May. What worries the street and what is the way forward?
Markets have been quite volatile since the start of 2022, characterized by two bulls in January and March interspersed with a sharp correction on February 22 triggered by the Ukraine-Russia war.

Amid all of this, market views have swung between risk and risk sentiments, as evidenced by volatility indices.

We believe there are two central themes that will affect the market. First, the trajectory of future corporate earnings and that of global liquidity dictated by the normalization of monetary policy by the main central banks, mainly the US Federal.

The market is adjusting to the possibility of a faster-than-expected rise in US rates and a rapid reduction in the balance sheet than previously thought.

These are based on the fact that inflationary trends are taking root around the world, which would also require a higher level of monetary policy normalization.

It is also becoming clear that corporate earnings will face downward revisions due to mounting cost pressure. Future earnings forecasts for Nifty 50 at 16-18% in FY23-24 after nearly 40% gains in FY22 seem very optimistic.

We’re seeing a back-to-back double-digit drop in Netflix stocks. Is there a learning lesson for India Inc. here? What are your views?
Major themes based on the digital explosion following the Covid lockdown had led to an exponential increase in these names. The low risk-free rate and the collapse of the market risk premium due to the overdose of liquidity caused valuations to rise significantly.

Thus, the recent disappointments on subscriptions in a context of rising risk-free rates and rising market risk premium correct the euphoria.

So it looks like the valuation expansion embedded in the post-pandemic digitization theme is about to undergo a sharp correction; this will also be relevant for the Indian market.

Inflation seems to be the biggest risk facing the stock market, not just in India, but across the globe. How can investors build an inflation-proof portfolio?
High inflation should be offset by a faster-than-expected normalization of monetary policy in most economies.

The channels through which monetary policy measures would reduce inflation would involve a correction in asset prices. Thus, what we have been experiencing since the 4th quarter of 2021 is an erosion of prices on the bond and equity markets.

On the other hand, commodity markets remained extremely dynamic, supporting the synchronous rise observed in 2021.

We believe this increases the likelihood of aggressive monetary policy and a hard landing. Therefore, commodity markets should be the next to correct.

Therefore, it is unlikely to be an easy market for investors. A portfolio should be balanced, a reasonable mix of fixed income, credit and non-cyclical equity components. Going forward, when volatility sets in, consumer themes with a strong presence in the market should do well.

The exodus of FIIs is a bit worrying, especially for the 7th consecutive month (cash segment of Indian equity markets). Are global portfolio managers adjusting their portfolio? Which seems to cause panic.
The withdrawal of FII from the Indian market has been substantial, $17 billion in FY22, and it continues to deplete even in the current FY. The intensity of the FII downturn has been particularly severe over the past 5 months.

What is surprising is that it happened in anticipation of the normalization of monetary policy by the US Fed when a substantial part of the normalization has yet to take place.

The other contributing factor was the overvalued situation of the Indian markets on a global comparison basis.

Now that we are talking about FIIs – we also have a famous adage “sell in May and walk away”. At first glance, we could see another month of selling at least in the Indian equity market spot market. What are your views?
I expect FII flows into the Indian market to remain modest. Domestic flows, particularly in UCITS oriented towards sectoral, thematic and flexicap themes, offset outflows from FIIs.

We need to watch what happens when domestic liquidity also shrinks due to the acceleration of policy normalization by the RBI.

Where do you find value in this market?
Rural themes particularly favor autos, and we also like consumer themes that can benefit from the near-term recovery in urban employment.

Otherwise HDFC Bank – where does the smart money go?
We have been underweight the BFSI sector where we see valuation risks from volatile global variables and margin compression due to higher interest rate scenarios and intense competition.

We also believe that the best NPA cycle enabled by post-Covid regulatory forbearance may be behind us. The future trajectory will be driven by market share gains and profitable capital leverage. Thus, we expect greater investor interest in names like ICICI Bank.

What is your vision of the IT sector?
The IT sector continues to benefit from good commercial momentum given a solid order book and hiring plans. But concerns about margins are now visible. The sector has outperformed since the Covid lows and there are valuation issues.

Investors are also eyeing a recessionary scenario in the US due to high inflation and aggressive Fed tightening. We are therefore seeing a correction in sector valuations.

In an environment of rising interest rates and rising commodity prices, do you think small and mid caps could struggle in FY23? What should investors’ strategy be?
Earnings and valuation risks are particularly high for the small and mid cap segments, as the illiquidity premium has been significantly undervalued.

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts belong to them. These do not represent the views of Economic Times)

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