Dalal Street Voice: Warren Buffett indicator signals caution; banking looks promising for 2022: Yuvraj Thakker of BP Wealth

Yuvraj A. Thakker, Managing Director, BP Wealth said that India's Mcap to GDP currently at 116% (FY22E GDP) is much higher than its long-term average of 79% and is at the highest level since 2007.

In an interview with Zeebiz's Kshitij Anand, Thakker believes that banking is one sector that continues to look promising because of the economy's pick up and the end of the high provisioning cycle in the last few years. Edited excerpts:

Q) What are your views on markets in 2022 after over 20% gains in the previous year? We have already seen some knee-jerk reactions amid the US Fed hike, but the bulls managed to hold on to gains.

A) We expect equity markets to continue outperforming other major asset classes. However, return expectations should be lowered.

Growth drivers and the future outlook on India remain positive, but markets will feel the pressure of lower money supply, liquidity constraints, and expensive valuations.

Q) What are your expectations from Budget 2022 from the finance minister? Do you think the government will be able to maintain the fiscal deficit target?

A) India's economic recovery is likely to slow down with the rising Covid cases due to the new variant Omicron. In Budget 2022, we expect the Finance Minister to announce measures to speed up economic recovery and new schemes to benefit the common man.

Also, the FM should reveal an asset monetization plan to meet revenue targets and provide tax incentives in the upcoming budget.

However, due to rising Covid cases slowing down the economic recovery, India may trim its fiscal deficit target of 6.3% to 6.5% for the upcoming financial year.

Q) Which sectors are likely to be in the spotlight in this Budget 2022?

A) The finance minister may announce relief measures for pandemic-led hard-hit sectors such as hospitality, focusing on affordable housing, infrastructure, and healthcare.

The budget will continue to promote Make in India and boost FDI inflows.

Q) Any stocks that you think could be in focus (economy-linked or high bets stocks)?

A) Banking is one sector that continues to look promising because of the economy's pick up and the end of the high provisioning cycle in the last few years.

ICICI Bank, State Bank of India and Federal Bank can be the best possible gainers in this theme.

Q) How do you see India Inc. faring in December quarter earnings? Will it get impacted from the restrictions as well as curfew imposed in various states of India?

A) India Inc is expected to post a mixed performance in December quarter earnings, with some sectors expected to do well while others may struggle led by the uneven economic recovery.

Higher input costs may lead to a miss in earnings estimates, and the management commentary will be tracked closely. Pandemic led restriction and curfews and the upcoming union budget 2022 will lead to volatility in the markets.

Q) What should retail investors be prepared for in 2022 – amid rise in valuations, 2 straight years of double-digit gains, as well as macro environment? Do you see a similar rise in Demat accounts as we saw in 2021 to 2022 as well?

A) 2021 was an unusual year, where markets around the globe were on a bull run due to several factors such as high liquidity, rise in the number of investors, the success of vaccinations, etc. However, it does not mean it will continue in 2022.

We expect the number of Demat accounts to continue to rise, as there has been an increase in financial literacy and awareness across the country.

With stocks trading at much higher valuations, market participants should reduce their expectations and invest in fundamentally sound stocks and trading at reasonable valuations.

Q) If the US Fed plans to hike rates in 2022, should one add more international funds, stocks, and ETFs to their portfolio?

A) Higher interest rates do impact the stocks negatively as it makes the cost of borrowing more expensive and thus reduces liquidity. However, markets may react unexpectedly, and diversification is key.

Investors should look to maintain a diversified portfolio of different asset classes based on their risk and return expectations to deal with rising interest rates.

Q) Market looks overvalued from the Warren Buffett indicator (Mcap to GDP). Does this ring a warning bell in the minds of investors?

A) Since March 2020, markets around the globe have rallied rapidly and will continue to do so as long as there is high liquidity and low inflation.

India's Mcap to GDP currently at 116% (FY22E GDP) is much higher than its long-term average of 79% and is at the highest level since 2007.

It has been turbulent as this ratio was 56% (FY20 GDP) at the end of FY20 from 80% in FY19. The Warren Buffet indicator will remain high if the long-term interest rates remain low, however, investors should remain cautious and pay attention towards hikes in interest rates and inflation levels.

Q) The second phase of the Green Energy Corridor of the Intra-State Transmission system has been approved at a cost of Rs 12,000 crore by the Union Cabinet. Which sectors are likely to get the benefit from green energy?

A) Green energy will obviously promote the country's long-term energy security, leading to ecologically sustainable growth. India's promotion of renewable energy has grown over the years, and sooner or later, there will be a significant shift towards such energy.

With the approval of the second phase of the green energy corridor, the companies that invest in green energy and suppliers to such companies will benefit.

Q) Any top 3-4 success mantra for retail investors for 2022?

A) The top success mantras for retail investors for 2022 are:

1) Don't be emotionally attached to any stock
2) Don't keep high expectations and expect a repeat of 2021 price performance; it may or may not happen, so keep no bias
3) When you enter a party (stock), ensure you enter at the right time, not while in the end when the desserts are being served.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)