Nifty to trade flat with negative bias over next 3 months; SBI Life, Infosys among top picks | INTERVIEW

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Markets are likely to remain volatile in the near-term amid key issues like slowly recovering supply chains, and geopolitical tension. Nifty is expected to trade flattish with a slight negative bias. It is most suitable to deploy cash in high conviction stock ideas where near term developments do not permanently damage long term prospects, said Unmesh Sharma Head- Institutional Equities, HDFC Securities. IT, Insurance, Retail are some of the sectors that Sharma is bullish on. SBI Life, Max financial, Infosys, Crompton greaves, Aditya Birla Fashion and Ultratech cement are among the top stock picks. Here are the edited excerpts from Unmesh Sharma’s interview with Harshita Tyagi of FinancialExpress.com.

Markets have been extremely volatile lately, what is the reason?

Market has been volatile lately driven by several factors namely ongoing Ukraine-Russia war leading to geopolitical instability and commodity supply chain disruptions. In addition there is a global risk-off theme leading to relentless selling by FPIs in equities including India & other emerging markets. And then there are Interest rate hikes / balance sheet trimming being conducted by the US FED. 

In our view, the most relevant domestic factors impacting the market & economy are rising commodities, crude oil and food prices. Inflation remains top-of-mind with WPI inflation at a 9 year high of 15% while CPI inflation is nearing the peak of 8%. While it diminishes the earnings growth visibility of commodity consumer companies, it also elevates the probability of RBI resorting to aggressive interest rate hikes. A confluence of these factors is leading to elevated volatility in the market.

What is the ideal strategy for investors to sail through this volatility?

As per our investing philosophy, we follow the strategy of remaining consistently invested in markets in our top bottom-up ideas. During this turbulent socio-economic situation, it is most suitable to deploy cash in high conviction stock ideas where near term developments do not permanently damage long term prospects.

Where do you see Nifty heading in near-term and can we see it rallying towards 18,000?

We believe the underlying socio-economic variables warrant more caution than cheer. The lack of visibility on resolution of key issues like slowly recovering supply chains, and geopolitical tension are weighing on markets. The elephant in the room is the fight against inflation by global central banks notably the Fed. We believe the market will remain muted till there is visibility that the most intense part of this fight is coming to an end. On the other hand, we could see a significant market event which causes the central banks to lose nerve in this fight and turn dovish. Neither of these outcomes seem plausible before the end of the year.

Under this backdrop, it is unlikely that Nifty will reach and sustain at 18,000 in three months time. Indeed, we expect the index to remain flattish with a slight negative bias. Domestic inflows (notably through the SIP route) have been keeping the Indian market afloat since the FII exodus that began in October 2021. In case of continued FPI selling, these domestic flows will find it tough to cushion the equity markets from further down-side. Hence, we are likely to witness a range-bound Nifty in the short to medium term with higher than normal volatility.

RBI recently hiked rates and there are expectations of another hike in upcoming MPC. Where do you see rate sensitive stocks -like banks, auto, realty in this scenario?

The RBI has belatedly joined the fight against inflation. We expect the RBI to hike rates 3-4 times more this year and expect the terminal Repo rate in this cycle at 5.6%. We are positive on select large banking stocks as a rising interest rate scenario will be beneficial for those with a higher CASA base in the short to medium term. The automobile sector had been beaten down for last few years due to various structural reasons. In our view, the worst is behind us and the sector would recover hereon. 

Over the medium term, we expect elevated metal prices to soften, supply chain disruptions to improve gradually and a pickup in demand to come through in the medium term. In addition, the lack of price appreciation in recent past in these auto stocks provide valuation comfort. We have a positive outlook on the long term thesis of the residential real estate sector; pre-sales numbers are showing a favourable trajectory and we are likely to witness an up-cycle in the forthcoming years.

What are the key themes, sectors that investors must look at this year for returns?

The HSIE Research team has spotted some interesting long term structural themes in action in the economy currently, which can throw up investing ideas. Within these, we continue to pick stocks using a bottom up approach.

– Driven by sustained growth delivered by IT companies and burgeoning startup eco-system over the last few years, urban disposable income has been rising. It is leading to low ticket consumer discretionary growth such as food and beverages, apparels and retail. Further, rising disposal incomes of IT sector employees are leading to real estate growth in cities like Pune, Bangalore and Hyderabad. This has multiplier effects on growth of building materials and household appliances. We are bullish on growth of all these mentioned sectors.

– With increase in disposable income of middle income group and awareness about markets, equity market participation has been increasing. It has resulted in a sharp surge in country’s demat accounts from 4 Cr in FY2020 to 9 Cr in FY22. Also monthly SIP collections have risen at a strong pace from Rs 4,335cr in Mar’17 to Rs 12328 Cr in Mar’22 as well. Hence, we remain positive on insurance and capital market companies.

– We are also bullish on Indian chemical story. The industry is witnessing unprecedented levels of CAPEX on the back of global supply chain diversification. Expertise in complex chemical manufacturing, cost advantage and strong relationships with global clientele i.e. large pharmaceutical and agrochemical players are strong tailwinds which will help propel the Indian chemical industry to greater heights in the forthcoming years.

– PLI push on localization of manufacturing: Various sectors (such as autos, textiles, durables) covered under government’s flagship production linked incentive (PLI) program are long term solutions of country’s increasing import dependence. The policy focuses on manufacturing locally with improved domestic value addition which will create an improved ecosystem in the country.

What are your top stock picks in terms of an ideal portfolio?

According to the themes reflected in the model portfolio published by the HSIE Research Team, our preferred stock picks from these sectors include SBI Life, Max Financial, Infosys, Crompton Greaves, Aditya Birla Fashion, ICICI Securities and Ultratech Cement.

(The stock recommendations in this story are by the respective research analyst and brokerage firm. FinancialExpress.com does not bear any responsibility for their investment advice. Capital markets investments are subject to rules and regulations. Please consult your investment advisor before investing.)