Foreign Flows Weigh on Markets, but Earnings Signals Offer Select Opportunities: Sandip Sabharwal
Understanding the Current Market Dynamics
The Indian equity markets are currently facing turbulence, primarily influenced by substantial foreign investor outflows. While the overall sentiment may appear negative, underlying corporate performance tells a more optimistic tale. Sandip Sabharwal, a respected market expert, emphasizes that this phase is led by momentum-driven global asset reallocations rather than deteriorating fundamentals.
Key Insights from Sandip Sabharwal
– Foreign Investment Trends:
– A noticeable shift is occurring as foreign investor funds are reallocating away from India.
– Capital is being directed towards other markets, including Korea, Hong Kong, and Brazil.
– This trend-driven movement may persist, notes Sabharwal, despite positive company-level data painting a different picture.
– Earnings Performance Indicators:
– Recent earnings reports suggest stability and even improvement across several sectors.
– Banking Sector:
– Results from Axis Bank and Kotak Mahindra Bank indicate a rise in credit growth and resilient asset quality.
– Cement Industry:
– UltraTech Cement demonstrated impressive third-quarter volumes, outpacing industry growth, with overall cement demand up by 9-10%.
– Consumer Goods:
– Godrej Consumer Products pointed towards a resurgence in demand.
– Market Valuations:
– Sabharwal argues that current market corrections present compelling buying opportunities.
– Many stocks, particularly in the mid- and small-cap segments, are now approximately 50% cheaper than they were a few months ago.
Navigating Stock Selection in Challenging Times
With the market undergoing a broad earnings reset, selecting the right stocks has become increasingly complex. While valuations appear attractive, investors must exercise caution and discernment in their choices.
– Promising Candidates:
– Large Caps:
– Larsen & Toubro is highlighted as a strong contender due to its solid fundamentals.
– Banking Picks:
– Axis Bank stands out based on valuation and performance metrics, while ICICI Bank is recognized as a quality franchise despite slight recent weaknesses.
– Consumer Sector Potential:
– Godrej Consumer Products is projected to yield a 15-20% return over the next 12-15 months based on positive management commentary and demand trends.
Looking Ahead: Budget Considerations and Global Trends
As the Union Budget approaches, Sabharwal notes that many investors might be cautious, although expectations for significant positive surprises are low. He observes that:
– The probability of minimal outcomes from the Budget is greater, yet that might not necessarily be negative since much has already been priced in.
– On a global scale, he highlights a diversification trend, with capital moving from equities into alternative assets, such as commodities.
Volatile Commodity Markets
Sabharwal describes recent sharp price movements in metals and precious commodities as extreme and unsustainable. He cautions:
– People should be cautious. The rapid increases in silver and gold prices are reminiscent of unsustainable trends seen during the 2000 technology bubble.
Earnings Growth Outlook
Looking to the future, Sabharwal predicts that FY27 could witness significant earnings growth, alongside gradual inflation increase from near-zero levels to around 3-4%. He notes:
– Next year, a 14-15% earnings growth, compared to a low base, is realistic, although future predictions remain complex.
He acknowledges ongoing margin pressures in banking due to net interest margin compression, but anticipates these challenges easing in the coming year.
Final Thoughts: Selectivity in PSU Banking Stocks
Within the banking sector, Sabharwal maintains a preference for private lenders and emphasizes selectivity in public sector banks. He exclusively endorses State Bank of India (SBI), citing concerns over unpredictable asset quality and a declining market share in deposits from public sector banks.
– Notably, PSBs’ deposit share has decreased from 63% five years ago to about 54-55% today, potentially leading to increased funding costs and reduced competitiveness.
In conclusion, Sandip Sabharwal’s insights reveal both challenges and opportunities in the current market landscape. While foreign investor outflows weigh heavily on sentiment, the underlying earnings signals present select opportunities for discerning investors. The emphasis on selectivity and careful stock picking remains paramount in navigating these market conditions.