'Wise to invest in quality large-cap and mid-cap stocks'

'Earning expectations remain strong.'

The benchmark S&P BSE Sensex and the Nifty50 indices have corrected 10 per cent from their recent January peaks as global headwinds including Ukraine-Russia conflict, soaring oil prices, and sustained FPI selling weighed on the markets.

Against this backdrop, B Gopkumar, MD & CEO, Axis Securities, tells Nikita Vashisht/Business Standard that given the volatility, it is wise to invest in quality large-cap and mid-cap stocks, as the earning expectations remain strong.

With the Ukraine-Russia conflict deepening, where are markets headed?

Geopolitical events often come up with short-term reactions in the market as the dominant news flow leads to market volatility.

The current situation could worsen the current inflation problem, harm global trade, and put a downside risk to economic growth.

As long as the economic impact is limited, the financial markets will shift the focus back on inflation and the view of the central bank on the number of rate hikes in the current calendar year.

The US Federal Reserve's (US Fed's) stance will be the deciding factor for the market in the near-term.

How will stricter sanctions from the US and allies on Russia affect Indian markets?

If the US imposes strict sanctions on Russia, it would be difficult for Russia to export oil in the global market, leading to a further surge in crude oil prices.

In such a scenario, the oil-importing countries, especially India, will find it hard to maintain their trade deficit and the foreign exchange reserve.

It will also create inflationary pressure in the domestic market and lead to a rise in raw material prices, impacting the margin pressure for the Indian corporate sector.

How are you seeing commodity prices in this backdrop?

Commodities will be the biggest gainers, given the Russia-Ukraine crisis. Energy prices are likely to go up in the near-term, and oil prices could see a peak in the short run.

As long as the Russia-Ukraine heat continues, the commodity will be a dominating theme versus the consumption theme.

Will the rate hike cycle be pushed back, globally and in India, given geopolitical uncertainties?

Current geopolitical developments are adding inflationary pressure in the global market, and hence, it is crucial to observe the view of central banks.

As we analyse the situation, we believe that oil will be a governing factor as possible downgrades in global GDP growth could slow the pace of rate hiking. However, we cannot rule out the possibility of an aggressive US Fed stance if they foresee a sharper pickup in inflation.

The broader view is that the central banks focus more on controlling the inflationary effects than the growth effects.

What is your outlook on the markets over the medium term? Have you tweaked your Nifty, Sensex targets for 2022?

The favorable structure emerging due to an increase in capex spending will enable banks to improve credit growth.

The overall boost in the Budget expenditure will help deliver broad-based growth in FY23. The earnings momentum would be the critical factor for the market performance, though it has been robust in the past few quarters and aligned with expectations for the current quarter.

We maintain our December 2022 Nifty50 target of 20,200, valuing it at 22x FY24E earnings.

In the medium-term, geopolitical development and the other macroeconomic factors like inflation and US Fed decision on the interest rate trajectory will be significant events to drive the market performance. We expect the second half of 2022 to be more stable than the first half.

Which sectors could see a sharp reversal once the markets stabilize? What is the prudent investment strategy right now?

We think a sharp reversal can happen in the banking and financial stocks, which got impacted due to the present volatility. The outlook for the sector has significantly improved in the last few quarters as the favorable structure emerging due to an increase in Capex spending will enable banks to improve credit growth.

A prudent investment strategy in the current environment would focus on the fundamentals. Given the increase in volatility, it is wise to invest in quality large-cap and mid-cap stocks, as the earning expectations remain strong.

Do you think the LIC IPO timeline will be changed/delayed given the uncertainty in the markets?

We believe timing such a large-scale IPO to be in tune with the ups and downs of markets is not a primary parameter.

Volatility is a part of stock markets and should be seen as a value creation opportunity for investors. That said, the steps taken by policymakers so far suggest that the indicative timeline will likely be adhered to and as planned.