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The risk-reward of the Indian market has improved and the market is looking more reasonably valued today, than six-nine months back, according to Prashant Jain, executive director and chief investment officer, HDFC AMC. He believes that the near-term outlook for the Indian economy looks steady, and over time, the country’s economic growth has the potential to accelerate meaningfully. The stock market veteran made these observations at a webinar on Mid-Year Review of Indian Economy & Markets.

According to him, while one may see some moderation in consumption growth, exports and capex recovery should help ensure good growth in the near term. He expects India to be the fastest growing economy in this decade and to emerge as the fifth largest economy before the end of the decade.

On interest rates, he feels that what we are experiencing is normalization of abnormally low interest rates prevalent over the last few years. The sharp pace at which the US yields have moved up has surprised everyone. But, he feels, in India, because interest rates did not fall as much as in the West, the normalisation too, will not be that sharp. So, this should have less impact.

On the topic on how rising inflation will impact the profits of companies, he highlighted how higher inflation may be good for some of the key segments of the Nifty. Roughly one-third of the profits pool of the Nifty comes from banks. Today, two-thirds of bank loan books comprise floating rate loans that will get re-priced once rates start rising. In fact, today, the share of floating rate loans is the highest in Indian banks’ balance sheet than ever before and therefore, the loans will reprice faster than deposits. So, higher inflation, which in turn is leading to higher interest rates will aid the margins profitability of banks, according to Jain. Also, higher inflation is leading to faster credit growth. Added to this, bank NPAs are also extremely low.

Further deconstructing the Nifty, Jain pointed that another one-third to one-fourth of the Nifty profits come from commodity-linked companies such as oil and gas, refining, coal and metals. Such companies are benefiting from high commodity prices and also high refining margins. High commodity prices and high inflation go hand in hand and so this segment too is not going to be adversely impacted by inflation, according to him. Apart from that, 15% of the Nifty is in software services and another 5% in pharmaceuticals. This 20% of the market will benefit from rupee depreciation which is likely because of the pressure on the balance of payments given the elevated oil prices and also the strong FII outflows. So, the outlook on this segment too looks quite reasonable.

Valuation-wise, Jain highlighted that bank stock multiples are now below long-term averages as this sector bore the biggest brunt of selling by FIIs. He also finds some value in IT stocks after correction in their P/E multiples. On capital goods companies, he feels that while the stock valuations look expensive, their outlook is quite robust. So, the sector may sustain the high multiples because when the cycle of capital spending turns, profit growth could be quite high.

He suggests that over the nest 3-6 months, one must invest in phases in equities and take advantage of sharp dips, if any. He, however, adds that one must invest only that money in the market which can be held for a longer period. Today, long-term investors have a good opportunity to buy Indian equity at reasonable valuation as most uncertainties seem to be priced in.

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