Although domestic stock markets have corrected from their all-time highs, stock valuations still appear to be overexploited given the economic outlook, said Investment advisor Sandip Sabharwal in an interview with Surbhi Jain of UK Time News Online. He added that consensus earnings estimates are very high and could be difficult to achieve. The market veteran added that the second wave of covid-19 is likely to impact the April-June quarterly earnings from various industries as states review imposition of lockdowns. Here are the edited excerpts.
In the midst of the second wave of COVID-19, do you find the market valuations reasonable? Is there a possibility of further correction?
Stock valuations seem exaggerated given the economic outlook, inflation dynamics and very high earnings growth expectations that exist today. The brokerage house earnings estimates are 32-35% for the current year which is very difficult to achieve and even with these expectations the markets are trading at 21 times earnings. The impact of the high expectations was seen last week in the results of Infosys and TCS which were moderate after the results. Last year, markets were supported by unprecedented monetary and fiscal stimuli that are unlikely to recur, especially as the United States is vaccinating very quickly and its economy is rebounding quickly. The rebound in the Chinese economy is also strong. As such, we could see India underperforming.
What do you think of the profits of IT companies so far?
The income of the computer company was good. However, the risk lies in earnings, as margins are likely to be under pressure given wage increases and lack of support from currency fluctuations. The benefit is that the business outlook remains strong for IT companies and this will prevent any significant decline in stock prices.
Do you think new localized restrictions, including curfews and weekend lockdowns to curb COVID, will hit the April-June quarter results?
Companies were facing unprecedented commodity price hikes even before the lockdowns, and the outlook for ex earnings growth in the metals and commodities basket looked volatile. Localized lockdowns are sort of a double whammy where margins are under pressure and on top of that sales are also likely to be affected which will reduce the operational leverage that could have been played out and help businesses to bypass some of the pressure on the margins. The impact on profits from April to June is likely to be real and significant, especially in certain pockets such as consumer goods, autos, retail, etc.
Last week, the IT and Realty indices plunged to 6%, what is weighing on these sectors?
Tech stocks were corrected simply because they had risen rapidly and most traders were overbought in the sector. Real estate is generally a high beta and whenever there is a strong market correction, these stocks correct more. However, the outlook for real estate is not negative and the cycle has turned after many years and is expected to continue.
What would be an appropriate strategy for Nifty Bank traders?
Nifty Bank traders should be careful. The improving banking sector outlook could be affected due to lockdowns and the impact on MSMEs and retail lending. The NPA chart might take longer to improve and that could be negative. On top of that, inflation has accelerated considerably, which is generally negative for financials.
Indian rupee becomes worst performing currency in Asia in just two weeks, where does rupee go?
The outlook for INR is now geared more towards a depreciation cycle, as interest rate differentials between India and the US are unattractive given the outlook for growth and inflation. In the event that India’s economic recovery is weaker than that of other emerging markets due to the second wave of Covid, we could see the rupee’s underperformance continue.
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