Symptoms Of Liquidity Excesses May Not Fade Quickly: Neelkanth Mishra, Credit Suisse
While central banks globally and locally are starting to taper emergency accommodation introduced during the Covid crisis, the risk-taking behavior that these policies induced may not wind down in a hurry, said Neelkanth Mishra, India strategist at Credit Suisse.
There is a large number of people who haven't even seen a 10% drawdown and have seen steadily more speculative bets become more successful because the market just hasn't fallen, Mishra said in an interview. "The behaviour that induces is one of excessive risk-taking. I see signs of that and, on moderate drawdowns, that behaviour doesn't change."
The Indian equity markets, alongside global peers, gained sharply after a short-lived correction brought on by the Covid crisis in the early months of 2020. From a trough of 27,591 on April 3, 2020, the benchmark BSE Sensex has risen to 59,920 now. The NSE Nifty has risen from 8,083 to 17,887 in this period.
Benchmark indices have continued to gain despite concerns about stretched valuations and selling from a large institutional investor like Life Insurance Corporation of India. In the quarter ended September, LIC net sold nearly $12 billion, Mishra estimated. What that means is that a sharp reduction in the stock market seems unlikely, he said.
I do think it (equity market) will flatten out because it is very expensive now. But the symptoms of liquidity excesses may not fade away very quickly.Neelkanth Mishra, India Strategist, Credit Suisse
Growth Upside Surprise Built-In
The immediate risks to the local market are primarily global, Mishra said. The potential volatility that can be induced by any emerging concern on growth is significant, he said.
So far, markets have moved on the strong momentum seen across the global economy but there is still no clarity on the underlying strength in demand. "It's just an opening up trade."
Mishra fears that when the tide turns, underlying demand trends will not prove to be very strong. If global growth starts to become an issue, pockets of the equity market will see pressure. "So yes, that's a risk."
The fact that valuations are high adds to that risk.
Even if FY23 GDP estimates are bumped up by 4-5% and FY23 Nifty EPS estimates are bumped up by 10%, the Nifty, if it stays at current levels, would still be one standard deviation ahead of its average valuation. "It is really expensive even after you have built in a 10% upgrade to earnings," said Mishra, adding that this could mean the markets will "flat-line" as a whole.
Within the market, there are cyclicals that will do better, safety names that will taper off. But the markets as a whole may flat-line for the next 12 months.Neelkanth Mishra, India Strategist, Credit Suisse
Cyclicals Vs Tech
Mishra is focused on sectors and companies that would benefit from the cyclical recovery. "We have been overweight on financials and industrials and some of the car companies," he said. Credit growth, which is inching up, could pickup meaningfully as the cycle progresses, Mishra said.
While Credit Suisse was overweight on technology, the research house cut weightage on this set of stocks a few months back.
"My expectation is that the tech names will keep doing well. I don't think, from a topline perspective, businesses will do badly," said Mishra, adding that these companies will see pressure in terms of attrition levels and margins. "Therefore, I don't think that PE multiples being at 30-35 times forward is likely to sustain. So, once the volume growth stops surprising positively, I think PE multiples will come off."
The Commodity Cycle
On commodities, Credit Suisse is very bearish, Mishra said, adding that the house had downgraded its weightage on the sector in May. "I would be very worried. The last time Chinese real estate prices fell 5%, in 2015, steel prices globally had fallen to $300," said Mishra.
He pointed to the Chinese steel market, where demand has fallen even more than any anticipated fall in production. This, in turn, is leading to a fall in prices of Chinese steel, alongside prices of iron ore and coking coal.
While domestic Indian demand will be fine, prices will fall and this could lead to significant downside for Indian metal stocks, he said.
Watch the full conversation below: