High inflation and synchronous tightening in global liquidity led by the U.S. is driving the market towards capitulation, a phase when investors give up hope of gains and sell in panic.
That's according to Dhananjay Sinha, managing director and chief strategist at JM Financial Ltd. In the last six months, India's benchmark indices have slackened by about 15%, Sinha told BQ Prime's Niraj Shah in an interview.
"We are heading towards a global slowdown, every institution is scaling down the growth trajectory, the U.S. Fed has scaled down by more than 100 basis points," Sinha said. "These will start reflecting on India's growth and earnings expectation", he said, advising investors to wait for "eventual capitulation" instead of "getting brave".
"There will be more volatility as we progress forward but what would define the bottom are variables of capitulation, such as sharp fall in crude oil prices and geo-political resolutions," Sinha said.
According to him, metal and steel prices have already begun correcting, by up to 30%, which will hopefully be followed by agricultural commodities and then crude oil--as was the pattern from 2014 to 2016.
When capitulation takes place and prices fall, robust growth in earnings is unlikely as it brings deflation, he said. There may also be insolvency risk, which he calls the "second derivative of capitulation".
Valuation Worries
In the last seven to eight years, there has been a negative correlation between valuations and and return ratios. And because of the valuation multiple coming off, he said, the market will remain low.
In the past, the trailing 12-months price-to-earnings multiple has gone down to 15 times, while India is still at 21 times, according to Sinha. "Therefore, there is a considerable downside; and if earnings estimates come off, there could be more reasons."
Sinha expects a 15-20% downgrade in Nifty earnings for FY23 and FY24. He expects a GDP growth of 4% on a structural basis.
Sinha's Take On Sectors To Avoid And Buy
According to Sinha, cyclical sectors which are "rate sensitive" will be adversely impacted. Due to liquidity tightening, mid and small caps will take a "significant beating", he said.
Non-performing assets and banking sector can go through a difficult time after capitulation, he said.
Sectors such as the automobile, where the intensity of metal consumption and application of technology is high, appear as safer spots for portfolio performance.
Watch the full conversation here:
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