Jinesh Gopani, head of equity at Axis Mutual Fund, speaks to Mint about the prospects for the stock market in a rate hike scenario as well as the key themes that can play out for Indian investors over the next few years.

Both the US Federal Reserve and the Reserve Bank of India seem to be on a rate hike path. What effect will this have on the equity market?

You have to see how the rates have grown—whether they have grown very quickly, or in a measured way, as it has already been articulated by the Fed or RBI in the market. So, it is very difficult to guess how fast or how slow the rate hikes are going to be. But for sure, the rate hikes are coming, given the inflation levels, given the GDP growth which is around. So, there will be volatility in the market during the time of the event, which you saw 15 days back when there was a Fed meeting, and there was a lot of talk about how the tapering will go, and how the inflation will pan out. So, I think we will have to wait till December-January to see if this inflation is moving up, or if this inflation is a permanent aspect, and there is a need for these rate hikes to pull back demand. I think, as of now, it looks like a supply side issue, not major demand side related inflation. So, I don’t think people will sacrifice growth over interest rates.

To what extent is the real estate crisis in China going to affect us?

Apart from the noise around what’s happening in China, and if it can cause massive emerging market fallout, I don’t think we are directly connected to that. So, it will be more of an impact from flow perspective, not from an economy perspective. And what we understand is we do not want another type of Lehman kind of an event, and even then Chinese government would be aware about it, and not want to get into that sort of a domino effect.

What are the one or two themes that will play out in the market over the next few years? For example, private banks taking market share from state-run banks. So, are there similar things that can play out?

Some of the new platform companies may grab market shares either from the organized or unorganized segment. This can be one of the things that play out, talking purely in terms of earnings growth and sales growth. As you mentioned, private banks taking market shares of PSU banks, and possibly fintech firms grabbing market shares from private sector banks. Also, in the real estate space, a strong brand player can take the market share from tier-2, tier-3 city real estate companies in a particular region, or a particular segment.

Profits are getting concentrated in a few companies who are able to manage their balance sheet well, who are able to navigate their business cycle, and are able to raise capital at their well. So, wherever companies are meeting these characteristics, they will grab market share. And the biggest thing that we have seen with covid playing out is significant market share gain from the unorganized to the organized space.

Are there any sectors where valuations are a concern to you?

Across the market, there are concerns on valuation. 15-20 years back, when I came to the market, even 23-33 PE was looking expensive at that point, but the dynamics were different. Interest costs were very high. The cashflows were weak, the return on equity (RoE) was weak. If we fast forward to now, the RoE improvements have been strong, the cost of capital has come down, market share gains have been strong. Hence, you are commanding the valuation that you are commanding. Clearly, some of the IPOs that are coming, and the kind of valuations that they are getting, and we are thinking that the listed companies are better. But obviously, RoE is high, flows are very strong—globally and in domestic market, and the cost of capital is low, which is why there is higher valuation. If things have to reverse, if suddenly the costs go up, there will be concerns regarding valuation.