'Key risks on the stock market 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.'

"As long as growth persists, which will drive earnings, financial markets should remain stable," Amit Shah, head of India equity research at BNP Paribas, tells Puneet Wadhwa.

How are the markets reading the developments in Afghanistan? Are they cognisant of a geopolitical risk over the next few months due to this?

We do not see any immediate risk on the Indian markets as a result of the Taliban taking over Afghanistan.

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.

As things stand, we do not see any material impact on the equity markets.

What is the road ahead for the rest of 2021 for the equity market?

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.

Incremental data with regard to employment and inflation will be keenly watched to gauge the outlook for the rest of 2021.

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.

An accommodative central bank with encouraging commentary coming from companies post the June 2021 quarter results bodes well for the markets despite premium valuations.

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.

Should investors be cautious now?

It is very difficult to call the top or the bottom on markets as well as individual stocks.

Fundamentals with regard to earnings growth and an improving demand environment are comforting.

Valuations at different periods of the market rally have appeared expensive.

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.

However, we are getting incrementally selective among small and mid-cap stocks, and higher impetus is given to quality companies as valuations appear rich.

Do you expect the pace of foreign flows into Indian equities to pick up post the government's recent stand on retrospective taxation?

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.

For foreign direct investment in India, one of the most important aspects (among others) is the predictability and rationality of tax laws.

The recent retraction on retrospective taxation will go a long way in easing FDI and FII (foreign institutional investor) concerns with regard to making new investments in India.

Can inflation play spoilsport?

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.

In the current scenario, wherein pent-up demand is difficult to estimate, growth may not be compromised despite rising inflation.

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.

Hence, as long as growth persists, which will drive earnings, financial markets should remain stable.

Is the retail investor's participation in the equity markets here to stay?

Going by record inflows in July in Indian mutual funds, it seems like retail participation in the markets is here to stay.

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.

Which sectors are likely to lead the next leg of the market rally?

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.

In addition, we continue to like information technology and the telecom space.

Select pockets of consumer discretionary should also do well.

Your interpretation of the June 2021 quarter numbers.

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.

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.

A large part of the impact for Q1 earnings came from higher commodity costs, or input costs, which resulted in margin pressure.

Hereon, we expect financials to surprise positively along with IT and autos.