Global markets will likely stabilise post geopolitical turmoil and central bank rate hikes, helping Indian share markets touch new highs in the calendar year, said Sachin Shah, Fund Manager, Emkay Investment Managers in an interview with Kshitij Bhargava of The conflict between Russia and Ukraine poses a near-term headwind for domestic equity markets – only from a short term perspective, he said. Keeping in mind the current market turmoil, Shah does see an opportunity to go bottom fishing in select stocks. Here are the edited excerpts.

Midcap and smallcap stocks have seen a heavy correction so far this year. Would you say it is the right time to go bottom fishing now?

In the current calendar year 2022 (last two months), BSE Mid Cap Index is down by 8% and BSE Small Cap Index is down by 11%. What is important is that both the indices on a 1-year basis are still up by 15% & 31% respectively. In fact, BSE Small-Cap index continues to outperform the large-cap indices Sensex & Nifty. But if one looks at stock-price specific corrections, there are many-many stocks, which have corrected by more than 25%-50% from their peak levels over the last 4-5 months. And there is always good scope of investing on a bottoms-up basis in Mid-cap & Small-cap segments. So yes, in the recent fall of the markets there will be some stocks, which would have fallen sharply due to technical reasons and therefore fundamentally they offer a decent opportunity to invest at current attractive valuations. But clearly, these are very company- and business-specific cases where one is confident of the positive business outlook over the next few quarters to the next couple of years at least.

Where do you see Sensex and Nifty by the end of this year?

Once the global factors like the geopolitical ones gain stability and with clarity on the central bank policies, we do expect the global capital markets to stabilise. With positive domestic factors of higher economic growth and a stable political environment, we do expect the domestic equity markets to touch new highs in the current calendar year once the global markets stabilise.

We have seen new age internet and IT stocks correct recently with funds moving away from them, what are the reasons behind that outflow for both these categories?

Over the last twelve to eighteen months, investing in new age internet businesses was becoming more of a fad rather than a well- thought through investing rationale. In fact, there was a strong FOMO across the investor categories, right from foreign & domestic institutional investors to HNIs/ Family offices to Retail investors. Many participants were also playing the greater fool theory, where they believed that you can make money from buying overvalued securities because there will usually be someone who is willing to pay an even higher price. But eventually, as the market runs out of fools, prices will sell off.
In the IT stocks, the correction has mainly been because the big sellers in the Indian equity markets are FIIs over last many quarters and more so aggravated in the last couple of months. FIIs are significantly overweight on a few sectors like IT, BFSI and Pharma, and so it is natural that with them selling aggressively, the pressure on such sectors will be significant, at least in the short term.

What is the biggest short-term risk to the Indian share market at present? What is the biggest medium-term risk?

In the very short term clearly any further escalation of the Russia-Ukraine crisis can lead to a few more knee-jerk reactions. But from a medium-term and a more structural perspective, one of the biggest challenges is to understand the impact of the US Fed and other central banks increasing the interest rates and winding of other quantitative easing programs. Will the actions of the central bankers lead to a soft landing or a hard landing of the economies and various asset classes, particularly the financial assets? That’s a multi-billion question, but honestly, it’s very complicated.

But if one were to take the cue from the collective wisdom of the markets, say a broad-based global index like S&P 500 could help give some direction over the next few weeks to a few months. The first time the US Fed announced its decision on unwinding of quantitative easing and low interest rate regime, it was around early to mid-November. At that point in time the US S&P 500 was trading around 4,700 levels. Since then for more than three months, till early February the index continued to hover around the same levels, probably indicating the confused state of the overall global sentiments. It’s in the recent weeks, since the tension of the geopolitical environment that the S&P 500 index has slid down by around 5%-7%. But it is still too early to say, as it could bounce back quickly over the next few weeks.

hat sectors are you looking to buy amid the current market fall?

We believe that the Indian economy is at an inflection point and will get into a high economic growth virtuous positive cycle of at least three-four years from now. Most of the high frequency indicators like auto volumes, cement & steel demand, freight volumes on railway/road/air/coastal, electricity consumption, housing sales, exports, tax collections (GST & Direct) are clearly directing towards an upward trajectory of economic growth. We therefore believe that some of the economy related sectors like BFSI, Auto and Consumption will do really well. Also, export specific opportunities due to China+1 opportunity seem to be playing out well in some sectors like pharma & chemicals, auto-ancillaries, and engineering.