Asset Allocation: ETMarkets Smart Talk: Banks set to see strong earnings growth in coming quarters: Ajay Vora
In an interview with ETMarkets, Vora said, “The second half of the year is generally very strong for banks and as most loans have not yet been repriced, we may continue to see further NIM expansion for some banks.” Edited excerpts:
What is disrupting Indian markets at highs? FIIs have also become net buyers so far in November.
Over the past 12 months, FIIs have held back additional investment in India due to fears of a global recession and India’s massive outperformance against the MSCI EM (30%) and MSCI DM (10 -20%).
Peak FII holdings in India were closer to $665bn, which corrected to $525bn when we hit the lows and fell further to $585bn, although Nifty was closer from a historic high.
In terms of flows, FIIs are net sellers reaching $20 billion by 2023 and sold nearly $38 billion last year. Looking at the current scenario, the market is again at an all-time high and it is not advisable to worry about the Nifty.
What’s your take on the September quarter numbers that have come in so far? Do you foresee a trend that could also last over the next few quarters? What have been the main successes and failures according to you?
Nifty’s earnings are broadly stable to slightly negative at the aggregate level. This is due to the sharp contraction in cement and metals earnings which was widely expected.
Over the past month, both sectors have outperformed and are up 10-15%.
“ Back to recommendation stories
However, looking at earnings excluding these two sectors, NIFTY PAT is up almost 20% in line with expectations with a significant beat mainly from banks and a few individual companies like , , LT, etc.
Based on the first half figures, we expect FY23 earnings growth of 8-10%, compared to an initial forecast of 15%. Generally speaking, among major global turbulence and local headwinds, a 5% reduction in earnings is a very reasonable outcome.
This decline in the workforce can be attributed to two major sectors: raw materials,
and IT and to some extent all underperformed.
Banking stocks are back in the spotlight, which is a good thing as banking and financials are the biggest contributors to Nifty’s weighting. Do you think the trend will also continue in 2023?
We believe banks are still well positioned to deliver strong earnings growth over the next two quarters, based on robust credit growth, benign cost of credit and net margin expansion. interest (NIM).
S2 is generally very strong for banks and as most loans have not yet been repriced, we may continue to see further NIM expansion for some banks.
However, credit growth needs to be watched as it has an element of high inflation. But we still think 12-13% system-wide credit growth is also quite manageable in FY24.
The dollar index is moderating, which is a good sign for India. But, from FII’s perspective, what makes Indian an attractive destination?
DXY is more a function of inflation and therefore interest rates in the United States are relative to those in other countries. Now, while inflation is widely expected to peak, so have rates.
In this case, DXY has reached 115 levels. This improves the outlook for emerging markets in general. But now, if you look at the whole emerging market basket, just as we assess the sectors, India clearly ranks top for FII and, more importantly, they have very few options left. investment, excluding China, Taiwan, Russia and Brazil.
This is why we are seeing new funds being launched in global markets with emerging markets ex-China as a strategy which indirectly increases the allocation weight for India.
What do you think of the massive sell-off seen at some of the global tech giants? Do you see this as the first sign of a coming recession?
Honestly, we’re sitting in a market that’s 1/8th of the United States, so it won’t be fair for me to speak as an expert on the tech giants in the United States, but to put it very simply, the rates High interest rates have a negative impact on the long-duration growth cash flow which is the terminal value in DCF captured in the high M-caps of these companies.
So on the one hand we have a major earnings downgrade due to recession fears and on the other hand valuations are rising but also contracting sharply with a spike in long-term interest rates .
There is a growing debate regarding rising FD rates and stock yields. How has the market behaved in the past when interest rates were on the rise?
In my general experience, equity returns over the long term follow the nominal GDP growth rate, which should be around 10-12%. While FD rates can be around 7-8%.
That said, due to low interest rates for a long time, equity inflows have been strong and there may be a visible shift as FD rates rise.
But I think asset allocation is also tied to awareness and education about other asset classes. Here I would like to commend you and the publication for doing a great job in creating a strong culture of fairness among the middle income age group.
This will ensure a much larger inflow of domestic equities for the next few years.
We are a few % of the records. Do you foresee a new bullish cycle in 2023 before the 2023 budget?
Let’s look at the 3 important pillars of the Indian economy i.e. government finance, India Inc healthcare and Indian households – they are experiencing strong growth.
Turning now to India Inc, we have seen the profits of BSE 200, which make up a large portion of Indian business, grow cumulatively by almost 60% in FY20-23.
More importantly, the banking system is enjoying the best of its time with strong credit growth and benign asset quality.
While the Indian household seems to be the most confident over the last 5 years and more after going through the Covid-19 pandemic.
As a result, we are seeing record real estate sales, increased travel and other discretionary spending. I think we can see a decent recovery in the new year with an increase in FII allocations, as their AUC/map is at a ten-year low of just 17%.
How should investors play the theme of international investing in 2023?
Given the current situation, domestic investors should continue to focus on the Indian market as it is the biggest opportunity for them and a large portion of households are still underinvested.
Global markets are still not out of the woods and we don’t know what the implications of such a rate hike in the US may be, as this has never been seen before.
On the other hand, Europe and Japan are going through one of their worst monetary crises. So, in the midst of this, India is currently an oasis of growth.
(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)