Lot of hesitancy and scepticism among retail investors: Centrum Broking ED

'If the market movement remains positive for an extended period, flows would become healthy once again', said Anil Sarin

Markets have bounced back sharply from their recent lows as foreign investors returned to Indian shores in July. ANIL SARIN, executive director and chief investment officer for equities at Centrum Broking, in conversation with Puneet Wadhwa, says current conditions are supportive of investing in mid- and small-caps. Edited excerpts:

Did the recent bounce-back in equity markets take you by surprise?

Not really. There has been a lively debate about ‘peak inflation’ and resultant ‘peak interest rates’ for a while. When the market did not react very negatively to the (US) 9.1 per cent inflation print in July, it was a signal the worst of inflation fears have been discounted by the market.

A secondary confirmation was foreign institutional investor flows turning positive in July. Taken together, these two events provided enough advance notice of expected rise in markets.

Looking ahead, unless a fresh set of geopolitical events take place, markets should broadly consolidate at the current levels.

How sceptical are retail investors about this rally?

There is a lot of hesitancy and scepticism among retail investors. Inflows into mutual funds are related to market movement. If the market movement remains positive for an extended period, flows would become healthy once again.

Can developments in China destabilise global financial markets again?

Chinese debt levels are very high. Corporates are highly leveraged, and even consumers have a heavy debt burden (mostly for buying homes). Real estate forms 30 per cent of their economy, and its prices are down 22 per cent year-on-year in June. The Chinese government has flip-flopped by first curbing loans to real estate and now relaxing those terms to stabilise the sector.

After real estate, the second problem is exports, which have been impacted by the ‘zero Covid’ policy and also by the growing desire among international buyers to seek alternative sources of supply.

That being said, most Chinese debt is internal, and it continues to hoard foreign exchange reserves. With no shortage of dollars to repay loans, China’s excessive debt levels will not cause contagion in the global debt markets.

Is the risk-reward favourable to small- and mid-caps?

We continue to like that segment. We’ve noticed that small- and mid-caps do poorly during weak gross domestic product growth periods and do quite well during periods of economic buoyancy.

Strong periods allow faster growth for emerging industries (like logistics, e-commerce, staffing, etc). They also ease cash flows and increase opportunities for smaller players.

The current conditions are supportive of small- and mid-cap investing. However, investors have to be mindful about the quality and competitive strength of small- and mid-cap stocks they invest in.

Do you think domestic institutions that invested at lower levels will now look to cash out? What about foreign flows?

Domestic institutions continue to receive healthy inflows from systematic investment plans and otherwise. Valuations are reasonably high, but not too much. They do not have a real reason to sell.

Foreign flows should be broadly positive as long as there are no fresh shocks to the global economic order.

Longer term, there are very few alternatives to India among international emerging markets. We anticipate a Goldilocks scenario over the medium term, where both domestic and foreign investment flows would be positive.

Takeaways from the June quarter earnings season?

It’s been a mixed bag, with strong revenue growth and weaker gross margins. Covid-19 had impacted the base quarter, which made the comparison difficult. Hence, analysts shifted to comparisons with pre-Covid first quarter. Overall, margins have been impacted, and full-year estimates need to be revised downward. But this negative development is somewhat neutralised by a sharp rise in the order books of capital goods and infrastructure companies, and a strong rise in bank loans.

All these factors point towards a strengthening economy. Of course, there are headwinds, like higher raw material prices and deteriorating outlook for agricultural output. As such, we remain cautiously optimistic about markets in the medium term.

How are markets reading into the recent commodity price correction?

Commodities should rise gradually over time since there have been a lot of curbs on exploration and (ecologically-sensitive) mining inspired by the environmental, social, and governance movement.

Supply bottlenecks have emerged in some commodities. On the flip side, China seems to be getting into a structurally slower growth mode. This will have a cooling effect, at least in the short term. What makes forecasting really difficult is the financialisation of commodity markets, where interest rates and fund liquidity exaggerate commodity price movements in either direction.

Commodity prices have entered a volatile period and corporates/governments will have to evolve longer-term solutions to ensure adequate/economical supplies.