Banking stocks will underperform, as FPIs to continue their selling, says IIFL Securities

Notwithstanding foreign investors selling heavily, correction will not be large due to India and global growth story, says R Venkataraman, Chairman, IIFL Securities & Co-Promoter, IIFL Group. In an interview to BusinessLine , he says various risk factors that will affect market and opportunities going forward.

Though the equity market has scaled new peaks in 2021, investors remain nervous now due to selling since October... Is this a healthy correction or do you expect a deep one?　

Internationally, equities have been going through a choppy phase because of Omicron and liquidity withdrawal by central banks led by the US Federal Reserve. While Omicron fears may soon recede, liquidity withdrawal may go on for a few more months and markets may remain choppy and even decline a bit. However, global growth and India growth should be strong and there are chances of earnings upgrades in India hence the correction should not be large.

FPIs have turned sellers in the Indian markets, especially in the last couple of months. Why did they change their stance?

FPIs have been in a selling mode for several months. The estimated selling by FPIs in calendar 2021 in the secondary market may be almost $10 billion. There are several reasons for this including a perceived need to reduce weightage in banks as other sectors like e-commerce emerged, need to reduce India weightages as valuations kept getting expensive relative to other markets, reduced emerging markets weightages as liquidity tightening by central banks came closer after a long period of monetary accommodation.

Do you think this trend (of FPIs outflow) will continue in 2022 as well?

It can continue for a few months because in the near-term Omicron might worsen the inflation problem by causing supply disruptions. And in reaction to that the central bank liquidity withdrawal could go on, causing further selling in the near term. But this should also subside soon.

What are major risks that will affect the market in 2022?

Just like the Delta variant of the virus proved to be more lethal than Alpha, Omicron might be followed by a dangerous variant. Currently, the risk seems very low. Excessive tightening by central banks is another significant risk especially for emerging markets. Above all, the biggest risk is inflation which can get entrenched and prove troublesome in the medium-term.

Which theme will play out in 2022? What’s your take on banking sector, which has been underperforming of late?

There are several themes that can do well in 2022. A new wave of Covid-19 will bring in its wake a demand for acute therapies for another year. Continuous selling by FIIs in banks can continue to create underperformance in this pack.

India’s inclusion in global bond indices may draw large foreign currency inflows and help keep interest rates low and help with the continued momentum in the real estate and housing sector. Global commodities could stay firm and during such periods capex cycles accelerate and India could also see this. Companies like L&T will do well. Global demand is strong but led by US and with profitability at good levels US companies could continue their strong investment pick up in IT services and Indian IT industry could do very well. IT sector would also have a currency tailwind because with China loosening monetary policy its currency may depreciate and lead a round of depreciation of EM currencies and hence Indian rupee could also lose ground against the dollar helping the IT sector.

Chemicals will continue to benefit from China + 1 playing out. Government revenues will be strong and will help with continuation of capex emphasis and therefore infrastructure construction will be strong and construction companies will see strong order book.

What is your wish list from the Budget from capital market perspective?　

In the last two years, the policy environment has been supportive. The first thing would be to wish for continuity in this. Secondly a continuation of good quality of expenditure which means higher proportion of the budget devoted to capex, especially infrastructure. Next would be if the government were to consider reducing capital gains tax both short term and long term.

We would love to see some help extended to SME sector which has been hit hard by Covid. Above all, it will be important to continue on the fiscal consolidation path and if growth continues to be strong and fiscal consolidation accelerated then India could see rating upgrades by international agencies which will trigger a virtuous cycle of more in flows.

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