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Investor sentiments did not take a hit in FY21 despite uncertainties arising due to the coronavirus-induced disruptions. Will it stay the same in FY22?

Siddharth Khemka, Head–Retail Research, Broking & Distribution, MOFSL, in an interview with Money9, spoke about factors which will play a role in market movements and stocks to look out for.

Edited excerpts:

Q: After rallying about 70% in FY21, which factors do you think will drive Sensex and Nifty in the new financial year?

Khemka: Global liquidity due to massive stimulus by governments and central banks, low-interest rates, faster than expected reopening of the economy, a strong rebound in demand and sharp recovery in corporate earnings growth aided sentiment last year. However, over the past month, there are many elements of uncertainty gripping the market. This includes a rise in bond yields, inflation, high commodity prices and a spike in coronavirus cases in some countries including India. Thus how long do the monetary policies continue to be accommodative and support economic revival holds importance.

Going ahead, some of the sectoral reforms undertaken by the government would support the market. Despite the lockdowns in FY21, we expect Nifty Earnings growth to be steady in FY21. Further FY22 is likely to be a strong growth year and also start of a multi-year earnings growth cycle.

Q: Which 5 stocks do you think can give robust returns to investors in the next 12 months?

Khemka: Engineering conglomerate Larsen & Toubro, pharma major Sun Pharmaceuticals, IT firm Infosys, oil retailer BPCL and power company Tata Power are likely to do well in FY22.

Q: How can we boost equity investment penetration?

Khemka: By providing proper training and education to investors I think we can increase equity penetration in the country. At Motilal Oswal, we have launched ‘edumo’ series which helped investor to get knowledge about investing by watching a small video. Ease of doing transactions and rising internet penetration will also bring more and more investors in India.

Q: What should be the asset allocation strategy for investors now?

Khemka: Small investors should look at equities as an asset class to increase their wealth over the long term. The allocation within equity needs to be done as per one’s risk appetite. Largecaps are generally safer than the mid and small-cap stocks as they are more established and usually dominant in their industry, but they necessarily may not offer the same potential for high returns. Usually, small and midcap stocks offer higher growth prospects as they are still expanding their market share. But then it makes them more risky and prone to huge volatility. So large caps are more for conservative investment and investors can bet on them with reasonable conviction that they will not lose money, while aggressive investors can consider either small or midcaps.

Q: What could be the biggest investment theme for FY22?

Khemka: The sharp recovery in the global economy and the government push towards higher investments into the economy has led to some of the cyclical sectors doing well in the last few months. Also, the unlock trade playing out well, some of the sectors which had initially fallen at the start of the pandemic started to recover. For FY21, the Nifty Metal index sharply outperformed gaining 151% in FY21 led by a sharp recovery in global demand and a rise in commodity prices. Nifty Auto followed with gains of 108%, Nifty IT over 103% and Nifty Realty 90%. All these sectors sharply outperformed the market.

Nifty valuations at around 21x FY22 EPS are not inexpensive anymore and demand consistent earnings delivery ahead. Given the likelihood of some consolidation continuing in the near term, we would suggest investors to accumulate good quality companies on any declines in the market. The market has been witnessing rotation from high PE stocks to cyclical or value plays. This apart-the capex cycle is also expected to pick up in FY22. Thus from the next 12 months perspective, apart from being positive on IT, BFSI, healthcare, telecom, auto and consumer we also prefer some cyclical within metals, cement, oil & gas and PSU space.

Q: Do you think midcaps and smallcaps can outdo large caps over the next one year?

Khemka: Midcaps and smallcaps have shown resilience in FY21 compared to large caps. Over the last 12 months (FY21), Nifty Midcap 100 and Smallcap 100 indices are up 102% and 129% against a rise of 71% for the Nifty. Though over the last five years, they have underperformed. Opening up of the economy and strong high-frequency macro data have uplifted sentiment. The vaccination drive has further provided a boost to the Indian market, with much broader participation from midcaps and smallcaps. The drivers of earnings growth are incrementally shifting towards cyclical sectors. Lower interest rates, the prevalence of abundant liquidity, and broad-basing of economic recovery augur well for mid and small caps. While we are positive on the mid and smallcap space, we don’t believe that there would be a broad-based outperformance. One needs to be very selective within this space and look for high-quality managements with strong business growth drivers.

Q: Do you expect any big fall in Sensex and Nifty due to rapid rise in Covid cases?

Khemka: In the past few days, worries over the second wave of Covid in India has led to a sharp fall. India reported the biggest spike in Covid-19 infections in five months at a time experts found a new “double mutant variant” of the virus in the country. While there are concerns over the re-emergence of a more contagious virus, the vaccination process is also happening at a fast pace in India. As of March 29, more than six vaccine doses have been administered in India of which 1.26 crore doses were administered last week itself. We believe that the long term structure of the market remains positive. With the economic activity continuing its recovery, it could lead to the start of the earnings upgrade cycle. Further liquidity flows across emerging markets could remain strong which bodes well for Indian markets as well.