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Near term downgrades in earnings likely; valuations biggest risk for market: Geosphere Capital

market | Oct 21, 2021 9:40 AM IST

Near-term downgrades in earnings likely; valuations biggest risk for market: Geosphere Capital

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“The earnings cycle is still in the early stages, in the near-term there could be some earnings downgrades,” said Arvind Sanger, Managing Partner at Geosphere Capital Management, in an interview to CNBC-TV18. Sanger further mentioned that since the market is well ahead of fundamentals, valuations pose a big risk for the market.

“The earnings cycle is still in the early stages, in the near-term there could be some earnings downgrades,” said Arvind Sanger, Managing Partner at Geosphere Capital Management, in an interview with CNBC-TV18.

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The reality of the easy part of the cycle, which is the free money, easy money driving this massive recovery in stock markets is coming to an end, he noted.
“The biggest risk to the market is the fact that the index is well ahead of earnings even though we are in a multiyear earnings recovery cycle. The reality is, market is well ahead of fundamentals and valuations are the biggest risk for the markets,” Sanger explained.
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According to him, the earnings cycle in the short-term is clearly going to have some headwinds in the rate of recovery because of some of the cost pressures.
He believes, India is having its own minor energy crisis similar to what China, UK and Europe are having. “That is going to be another factor of earnings headwinds for certain sectors of the economy and that you cannot get away from. The higher power prices and shortage of coal is going to weigh on some of the companies’ earnings,” Sanger said.
“I think we will have choppy markets but the headwinds of rising interest rates are going to be there on the excessive valuations. So, I think I would be a little patient in playing through this earnings recovery cycle and that applies not just to India, that applies to the US too. The biggest risk to some of these excessive valuations or some of these stretched valuations is a higher discount rate because of the high interest rate. I would use these choppy markets to be careful about piling into some of these super-expensive growth stocks on the first pullback,” he explained.
For the full interview, watch the accompanying video.
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