{"id":138636,"date":"2021-09-13T21:36:06","date_gmt":"2021-09-13T21:36:06","guid":{"rendered":"https:\/\/precoinnews.com\/?p=138636"},"modified":"2021-09-13T21:36:06","modified_gmt":"2021-09-13T21:36:06","slug":"key-risks-on-the-stock-market-are","status":"publish","type":"post","link":"https:\/\/precoinnews.com\/business\/key-risks-on-the-stock-market-are\/","title":{"rendered":"‘Key risks on the stock market are…’"},"content":{"rendered":"
‘Earlier-than-expected tapering from the US, followed by rate hikes, and locally, a potential third wave, which mimics the second wave in terms of severity.’<\/strong><\/p>\n “As long as growth persists, which will drive earnings, financial markets should remain stable,” Amit Shah<\/strong>, head of India equity research at BNP Paribas, tells Puneet Wadhwa<\/strong>.<\/p>\n How are the markets reading the developments in Afghanistan? Are they cognisant of a geopolitical risk over the next few months due to this?<\/strong><\/p>\n We do not see any immediate risk on the Indian markets as a result of the Taliban taking over Afghanistan.<\/p>\n In the event there is increased geopolitical risk globally, which is material in nature, there can be a near-term knee jerk reaction from the market.<\/p>\n As things stand, we do not see any material impact on the equity markets.<\/p>\n What is the road ahead for the rest of 2021 for the equity market?<\/strong><\/p>\n The market is likely to remain range-bound over the near term as clarity emerges with regard to the US Fed’s actions on tapering.<\/p>\n Incremental data with regard to employment and inflation will be keenly watched to gauge the outlook for the rest of 2021.<\/p>\n India has performed the best across emerging markets, largely on account of an accommodative central bank, unlike Mexico and Russia, wherein you already have seen rate hikes.<\/p>\n An accommodative central bank with encouraging commentary coming from companies post the June 2021 quarter results bodes well for the markets despite premium valuations.<\/p>\n The key risks are: Earlier-than-expected tapering from the US, followed by rate hikes, and locally, a potential third wave, which mimics the second wave in terms of severity.<\/p>\n Should investors be cautious now?<\/strong><\/p>\n It is very difficult to call the top or the bottom on markets as well as individual stocks.<\/p>\n Fundamentals with regard to earnings growth and an improving demand environment are comforting.<\/p>\n Valuations at different periods of the market rally have appeared expensive.<\/p>\n However, the markets have continued to rally, supported by earnings growth, accommodative central bank policies, declining Covid cases post the second wave, a rapid recovery in high frequency indicators along with continued global liquidity.<\/p>\n However, we are getting incrementally selective among small and mid-cap stocks, and higher impetus is given to quality companies as valuations appear rich.<\/p>\n Do you expect the pace of foreign flows into Indian equities to pick up post the government’s recent stand on retrospective taxation?<\/strong><\/p>\n The government’s recent stand on retrospective taxation was a much-needed course correction. It comes at the right time when India is looking to prove its stand as an attractive investment destination.<\/p>\n For foreign direct investment in India, one of the most important aspects (among others<\/em>) is the predictability and rationality of tax laws.<\/p>\n The recent retraction on retrospective taxation will go a long way in easing FDI and FII (foreign institutional investor<\/em>) concerns with regard to making new investments in India.<\/p>\n Can inflation play spoilsport?<\/strong><\/p>\n It is difficult to take a call on RBI’s actions in the event inflation proves to be non-transient, as growth may still not falter as inflation impacts growth differently in different cycles.<\/p>\n In the current scenario, wherein pent-up demand is difficult to estimate, growth may not be compromised despite rising inflation.<\/p>\n Further, the RBI may not want to jeopardise the start-stop recovery by reacting to inflationary trends as long as it remains confident about growth.<\/p>\n Hence, as long as growth persists, which will drive earnings, financial markets should remain stable.<\/p>\n Is the retail investor’s participation in the equity markets here to stay?<\/strong><\/p>\n Going by record inflows in July in Indian mutual funds, it seems like retail participation in the markets is here to stay.<\/p>\n Inflows had slowed down during the second Covid wave, but the quick recovery has boosted retail confidence in economic growth and resultant optimism about equity markets.<\/p>\n Which sectors are likely to lead the next leg of the market rally?<\/strong><\/p>\n Financials will be leaders for the next leg of the rally, as it is one of the few sectors that is still trading at historical mean valuations.<\/p>\n In addition, we continue to like information technology and the telecom space.<\/p>\n Select pockets of consumer discretionary should also do well.<\/p>\n Your interpretation of the June 2021 quarter numbers.<\/strong><\/p>\n Overall, the June 2021 quarter result season has been a mixed bag. However, this was in line with expectations as the second wave and selective lockdowns made analysing demand trends very difficult.<\/p>\n FY22 earnings will likely see some downgrades on back of the June 2021 quarter results with some portion of it spilling over to FY23 as well.<\/p>\n A large part of the impact for Q1 earnings came from higher commodity costs, or input costs, which resulted in margin pressure.<\/p>\n Hereon, we expect financials to surprise positively along with IT and autos.<\/p>\n