Q2FY22 preview looks better than Q1FY22: Vinod Nair, Geojit Financial

Rising bond yields, inflation, commodity prices coupled with power outages in China have sent jitters across the globe. Indian equity markets are no different. Given the current market volatility and Q2FY22 result just round the corner, Money9 spoke with Vinod Nair, Head of Research at Geojit Financial Services to make sense of global news surrounding the financial markets and understand what to expect from the upcoming earnings season. Here are the edited excerpts of the conversation:

What is your view on the markets? Is it a buy on dips market or sell and wait for a correction market?

On a near-term basis, buying at dip will be the best strategy due to economic gains from unlocking. However, on a medium-term basis, it will be a challenge to maintain the same uptrend due to global volatility, so suggest to sell on rally. While doing that have a plan to revamp your portfolio with a mix of equities to benefit from unlocking and a balanced approach of equity, debt & gold, based on your risk profile.

The power outage in China is signaling foreshadow shortages of global goods & commodities, how is it going to impact India, and what are the silver linings for India?

India is not a big exporter of such goods and commodities. It will have a mixed effect on the Indian market in which integrated manufacturers will benefit from high prices, while the broad market will be impacted due to fall in profitability from high input costs.

Can India also see a China like scenario as stockpiles of coal are reduced to 9.3mnt, the lowest since October 2018, according to CEA data?

There is a lot of speculation about what is happening in China and the reasons for the shortfall of commodities and electricity. It could be a combination effect of Evergrande, complaints made by public on reality, import restrictions announced by China due to covid related allegations made by other countries and the government’s push on realty & infra spending to recover the economic growth. The possibility for a similar type of effect in India is low, though supply chain issues & a sudden rise in electricity demand will have an effect in the short term.

Rising commodity and power prices are leading to inflation. But some central bankers are of the opinion that the rising prices are temporary due to supply-side constraints and sudden surge in demand. Do you see it otherwise?

I agree with the central banks view that the current spike of inflation is due to supply chain constraints and will reverse as the global economy reopens steadily. However, there is a rising risk that this high short-term inflation will spread to the medium-term as the whole global economy is going to bear a mismatch in demand & supply. This will drive central banks to reconsider the easy monetary policy.

Despite a mild correction in benchmark indices, public sector enterprises continue their upward what’s fueling this rally and how sustainable is it?

Rise in international energy prices, benefit from prompt correction action framework for PSUB and reforms undertaken like divestment & monetization has upgraded the outlook of PSE’s, which will help in the long-term.

Realty is another sector that is on a strong footing. Do think it is just the tip of the iceberg or all the positives for the sector priced in at current levels?

Well, demand for realty is improving due to marginal correction in reality prices and low-interest rates. Month on Month registration is improving due to the never-ending demand of the public for housing. Unlocking of the economy is expected to boost commercial demand in the future. However, valuation is on the upper band, which will impact the performance in the short to medium term.

After a strong rally since last year, metal stocks have seen meaningful corrections in the recent past. With Iron ore futures January deliveries jumping 10% to 752.5 yuan do see it as an uptrend resuming for metal stocks?

The long-term outlook for the metal sector is positive due to fiscal spending announced across the world and the re-opening of the economy. Whereas, on a near-term basis supply chain issue, supercycle of commodity prices and delta variant is likely to affect the sector from fall in margin, high valuation and demand.

Mid & small caps stocks are showing strength after a brief pause in the month of August. So which are your top picks among them?

We have a positive view on the broad market due to reforms, unlocking of economy, upcoming of high-quality IPOs, which will provide an additional edge to Mid & Small caps. The dip in Mid & Small caps is an opportunity as the valuation has corrected well due to an uptick in earnings. However, we have to be specific about what type of business we buy due to consolidation in the global market and peak valuations. We like Pharma, Chemical, Auto, Hospitality, Media, ITES, Industrial Manufacturing and Power.

With the Q2 season just a few days away, how do you foresee it panning out and will trigger the next leg of a rally for the markets?

Preview of Q2 is better than Q1 due to no lockdown in global & domestic market and an uptick in demand. The reopening of the economy & upcoming festive season will upgrade the future outlook of Consumer Durables, Banking, Hospitality and Entertainment, though Q2 results may be muted. Other sectors on which reforms have been implemented such as PLI (performance-linked incentive), focus on clean energy and new generation companies will also provide a better management commentary for the future. IT sector is correcting before the start of the results due to peak valuation. However, this can revert as results are announced which have a robust outlook. Mixed bag results will be for sectors like Cement, Auto, Metals & Mining and Logistics due to the high cost of raw materials, low current demand & supply constraints.