Focus on bottom-up approach for superior portfolio returns

Supported by easing global geopolitical issues, cooling crude oil prices from higher levels and moderation in FPI outflows confirmed by inflows from domestic institutions, domestic equities rallied c.12-13% from March ’22 lows recovery of. The focus is likely to be on the upcoming Q4 FY22 earnings season and how domestic demand trends shape up with the upcoming wedding festivities season.

We believe that investors need to focus on a bottom-up approach for better portfolio returns. India Inc is likely to face significant adverse conditions in terms of margin pressures and possible demand disruption in the near future. Therefore, a range-bound move is expected in the index, which gives an opportunity to identify emerging leaders within sectors.

Improved farm incomes on the back of strong IT and engineering exports, normal monsoon, upcoming festive season, and better realizations could improve the ability to absorb macro shocks (due to higher crude oil prices) in the near term.

Equity valuations are now trading at reasonable levels (close to five year average P/E ratio for Nifty 50). We like companies that have the ability to demonstrate greater flexibility in managing their gross margins, along with industry-leading growth. The consensus EPS estimates for Nifty 50 have remained unchanged in the recent past as the fall in earnings of consumer companies on account of gross margin compression is likely to be offset by upgradation in earnings of commodity producers in sectors such as metals and oil and gas.

We remain positive on the large private sector banks in the financial sector as a large proportion of asset quality issues lag behind us while the focus remains on credit growth. We also prefer life insurance companies in India considering the longer period of premium growth. Other areas of priority are healthcare companies increasingly focusing on specialty drugs, telecommunications for their superior pricing power and chemicals with strong export tailwinds. We are neutral on the IT sector, Auto & Industrial & Infra due to costlier valuations, rising cost pressures where we expect a delay in private capex activity.

We have recently underperformed the consumer goods sector with negative bias on FMCG, foods and paints. FMCG companies may face adverse conditions in terms of sluggish rural growth, sharp rise in raw material cost and consumer downgrading.

We remain bullish on India’s long-term story, as core fundamentals continue to improve. Interim volatility may provide better opportunities for investors to increase exposure to equities or to re-align portfolio positioning. However, crude oil holding above $100/bbl could present a challenge to inflation and act as a risk to the fiscal maths and accelerated rate hikes by the Fed to global emerging market equities including India. could pose a risk to.

(The author is Mitesh Dalal, Director and Chief Investment Strategist, Standard Chartered Securities (India) Ltd.)

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