In the coming months, markets are likely to be under pressure with a downward bias while seeing good buying support from domestic institutions and retail at every sharp fall, says the Chief Investment Officer of Validus Wealth.

Life insurance behemoth LIC’s initial public offering is expected to hit Dalal Street in March. “It could be valued in the range of Rs 10 to Rs 21.5 lakh crore. Hence, this could be part of the top 10 most valued businesses on Indian exchanges, given the size and scale. Its weightage in indices is likely to be small as it would link with the stock’s free float,” Rajesh Cheruvu, Chief Investment Officer of Validus Wealth, said in an interview with Moneycontrol.

Free float market capitalisation of the company is calculated on the basis of shares that are readily available for trading in the market.

Oil prices are on the rise with the healthy global economic recovery over the past seven quarters, combined with the downward drift in US oil production and geopolitical frictions. Hence, “we think the current spurt is not completely short-lived; we might have to accept it as a new normal above $75 a barrel for the short to medium term,” he says.

The market turned weak for the current year after a 24 percent upside in the previous year. Do you expect the market mood to improve in the coming months and help it end 2022 with at least 10 percent returns?

Two years of the solid run-up in the markets appear to have priced in most of the gains of economic and earnings recovery ahead of time. This, combined with the tapering and rate hike worries, could lead to a breathtaking correction in equity markets across the globe in most of 2022. However, given that India’s relatively superior economic growth and consumer inflation continue to be in the RBI’s target range, we think Indian equities are likely to outperform most global markets. Moreover, given the medium- to long-term positive outlook on Indian markets, short term market bouts are likely to provide entry opportunities for investors.

Do you think the Ukraine-Russia tensions will end soon and as a result oil prices will correct sharply from current levels?

Oil prices are on the rise with the healthy global economic recovery over the past seven quarters, combined with the downward drift in US oil production and geopolitical frictions. Hence, we think the current spurt is not completely shortlived; we might have to accept it as a new normal above $75 a barrel for the short to medium term. However, the strength of the US dollar could limit a further meaningful spike in prices.

Do you expect any rate hike by the Federal Reserve in its next meeting to be held in March 2022?

Given the unusual persistence of consumer inflation and wage growth, it could press for the first hike as early as the March 22 meeting. Now that the debate has shifted to the quantum of hikes, expectations of policy rate hikes have risen to 150 bps in 2022 from 75 bps earlier. Further, tightening of liquidity through the Fed’s balance sheet shrinking could start in the second half of 2022. These two measures are likely to make availability and cost of liquidity less attractive.

What could be the weightage given to LIC in indices after its listing on the bourses?

Life insurance companies are valued based on their embedded value (EV). Their profitability has been assessed through gross written premiums, and comparable new business premiums help understand market share gains by a player. Indian life insurers are trading in the range of 2 to 4 times their embedded value based on the relative attractiveness of their product sets and profitability.

As per the recent filing, LIC’s EV is Rs 5.4 lakh crore; applying the multiples mentioned above, it could be valued in the range of Rs 10 to Rs 21.5 lakh crore. Hence, this could be part of the top 10 most valued businesses on Indian exchanges, given its size and scale. The weightage in indices is likely to be small as it would link with the stock’s free float.

Do you think the relentless selling by FIIs could keep the market under pressure in the coming months, though DIIs, so far, have managed to compensate the same to a major extent?

FPIs have been net sellers for more than six months now, on an average, of $1.2 billion a month. However, this has not impacted Indian markets as domestic participation is on the rise with monthly inflows of $2 billion. Net MF flows were favourable for the fifth consecutive month in January 2022, and SIP flows have been rising in sequential months and have touched $1.6 billion per month now.

From a sentiment perspective, markets are likely to be under pressure with a downward bias while seeing good buying support from domestic institutions and retail at every sharp fall.

Do you expect the Q4FY22 earnings to be better than Q3FY22, where companies saw margin pressure due to higher input costs?

The recent earnings season has played out marginally lower than expectations. Most of the disappointment is from higher raw material and operating costs. At the same time, the drop in interest costs points to continued deleveraging. However, the robust topline growth in a seasonal and sequential comparison suggests healthy growth in volumes. In addition, most of the cyclical segments delivered higher sales growth, the exception being consumer discretionary. We expect Q4 to be a continuum of this trend before it gets better in the next fiscal year.

However, down the line, we expect to see an improvement in realisations with stabilising commodity prices and the price hikes taken by many businesses, combined with normalisation of volumes in a few segments with the easing of supply-side constraints from Q1 FY23 onwards.

Have you spotted any themes that could be pursued now?

We like segments that will benefit from the ongoing government spending and businesses gaining from improved efficiencies through  digitisation, automation and scale benefits. Further, segments that suffered due to pandemic related constraints and costs are likely to come back strongly as those issues have started receding. Therefore, we think construction materials, niche technology, auto, life and general insurance, as well as microlenders could outperform the broader markets.