Adani group stock rout has shaken investor faith, says Gaurav Dua

It has been a choppy fortnight for Indian markets that braved Budget 2023-24 proposals and Adani Group developments. Gaurav Dua, senior vice-president, head of capital market strategy, Sharekhan by BNP Paribas, in conversation with Puneet Wadhwa, says global equity markets seem to have factored in a soft landing in the US and the early stirrings of a likely rate-cut cycle by the end of Calendars 2023 (CY23) or early 2024 (CY24). These, he believes, could turn questionable if inflationary pressures do not ease along expected lines. Edited excerpts:

With the Budget and the US Federal Reserve (Fed) meeting behind us, are there any triggers for the markets to gain ground in the short-to-medium term?

The Budget underlines the government’s commitment to support growth in the economy rather than turn populist ahead of crucial state elections and general elections next year.

On the global front, the actions taken by the Fed and the European Central Bank have been on expected lines with not-so-hawkish comments. However, the markets were hit by turbulence in Adani Group companies and the positives were overshadowed.

A monetary policy meeting this week and some important October-December 2022-23 results may influence the near-term direction of markets. Over the medium term, they are expected to stabilise as fundamentals come to the fore again.

What are the key risks markets are ignoring at current levels?

Markets have corrected to reasonable levels. However, the home-grown equity market is feeling the anguish of readjustment in allocation by foreign investors to factor in China’s zero-Covid relaxation and the valuation gap to other emerging markets narrowing after India’s huge outperformance last year. The readjustment could possibly persist for a prolonged period.

Global equity markets seem to be factoring in a soft landing in the US and the early stirrings of a probable rate-cut cycle by the end of CY23 or early CY24. These could turn questionable if inflationary pressures do not ease along expected lines.

In such a scenario, it is better to focus on the domestic economy — focused companies with structural growth and reasonable valuation.

We are positive on three investment themes of capital expenditure, credit, and consumption, and are advising investors to invest in our high-conviction ideas in these select spaces.

Are investors nervous in the light of Adani Group developments? What do they mean for flows into equity as an asset class?

A damning short-seller attack on Adani Group and the subsequent dramatic stock falls in the conglomerate’s group companies have shaken investor faith. However, the overall behaviour is quite mixed, with some investors using the volatility to selectively add to their investment positions. Some retail investors — especially new entrants — are pulling out of the markets. By and large, we do not expect this to have any tangible change in investor behaviour.

How insulated are banks from shocks, if any, arising from their exposure to Adani Group?

Most banks have disclosed the extent of exposure to Adani Group. Even after providing for a worst-case scenario, the correction in some banking stocks seems overdone. We continue to remain positive on the banking sector, given the uptick in core business on the back of healthy credit growth trends and the clearing up of all legacy asset quality issues. In hindsight, the recent volatility might turn out to be a godsend.

Is it a good idea to allocate money to debt/bonds from a one-year perspective?

At the current juncture of the interest-rate cycle, there is a case for investment in dynamic bond funds and tactically increasing exposure to duration funds. Yields are already at reasonable levels and a reversal in interest rates in the next 12-15 months could provide additional returns to investors.

Some of the smart money has already done the requisite adjustment, while most retail investors have not allocated any meaningful money to debt mutual funds. But the bigger risk in the retail segment is some shift of money to bank deposits since returns have moved up 200-250 basis points in the past year.

What are your corporate earnings estimates for 2023-24 (FY24)?

There is consensus on the Nifty50 earnings likely to grow 13-14 per cent in FY24, notwithstanding prospects of a global slowdown. A lot of growth will be provided by banks and financials, along with improvement in margins across most manufacturing companies on the back of slackening commodity prices.

There is always scope for some fine-tuning of estimates, but we do not expect any material downgrade in estimates as of now.