Spend on the infrastructure sector will aid faster economic growth as it has a high multiplier effect due to the positive impact on other sectors, Hemang Kapasi, Head of Equities, Sanctum Wealth Management said in an interview with Moneycontrol’s Kshitij Anand. Edited Excepts:
Q) Market hit fresh record highs? What is your outlook on markets for 2021?
A) The bull market rally shall continue, but return expectations need to be moderated. A lot of companies have reached reasonable valuation, and some are already above that.
Leaders in each sector shall continue to do well as they are gaining market share from the unorganized and weak players impacted by the pandemic-led disruption. Pockets of value can be found in infrastructure and financial sectors from here on.
Midcap and Smallcap have outperformed large cap funds recently, but they have more legs to rally.
There are areas that investors need to be cautious about and there will be some downgrade in annual estimates due to a soft Q1 of the current fiscal year.
Additionally, many segments are facing margin pressure due to a sharp rally in commodity prices. Market is focusing on the unlock trade.
Q) Will the scenario pan out exactly similar to what we saw last time considering that was a total lockdown and we are in partial lockdown?
A) Yes, unlock trade is in focus off late in the market. But, one needs to factor in these possible scenarios as risks to these trades emanate from the lower pace of vaccination and possibly a 3rd wave of the pandemic.
The principal difference from last time is that businesses have adopted disruption in the supply chain and managed costs which helped them navigate the uncertain demand scenario during the last year.
Going forward, we see limited benefit from savings on the cost front aided with rising raw material inflation to offset any uncertainty on the demand front.
Having said that, investors can look at sectors where demand has been severely impacted for investment from a longer-term time horizon.
One can look at businesses in the Hospitality sectors like Hotels, Restaurants, Travel, apparel, Footwear, Entertainment, and allied sectors which might see demand surging once the complete unlock takes place.
Q) What should be the ideal strategy now – should one book profits and then deploy cash at lower levels?
A) Corrections are integral to market performance. As always investors are tempted to time the markets to derive short-term gains.
But, time in the market is far more important than timing the market as you give your assets time to compound and cut the short-term noise out of them.
A study on S&P 500 Index shows that, if you had missed the 10 best days then your annualized returns are lower by over 350 basis points. In fact, if you missed the 30 best days, then the returns are negative.
In India, in the last 21 years starting January 2000 or the last 257 months, the Nifty 50 index has hit a new high in 58 out of 257 months.
There have been times when markets have seen multiple highs in the same year and at times none. But, on average, the stock markets hit a new high once every 5 months.
Investors should avoid taking call on market direction for their investments and should adopt an asset allocation matrix suiting their long-term goals
Q) Which sectors likely to lead the next rally on D-Street? Time for sectoral rotation and look at sectors that remained underperformers?
A) If we step back and look at last year, 60%+ returns on the Nifty 50 Index have been masked by sharp sector rotations.
Talking about sectors, there is value emerging in the infrastructure sector. Firstly, this year the budget by the Central government has the highest ever allocation to capital expenditure of Rs 1.08 lakh crore for buildings highways, setting up of DFI to finance big-ticket projects in highways, ports, and railways sector.
Secondly, >25% of aggregate state budgets are allocated towards infrastructure spending. The second half of CY21 saw large order books been awarded by states to various players.
Spend on the infrastructure sector will aid faster economic growth as it has a high multiplier effect due to the positive impact on other sectors
Q) What are the key risks that the Indian market faces in the year 2021?
A) One of the important factors in equity markets is liquidity. Currently, the world over markets are flush with liquidity, thanks to stimulus packages led by money printing across the globe by central banks and governments.
Inflation is on the rise as metal and agricultural commodity prices are hovering at high prices seen in the recent past led by anticipation of economic recovery and supply chain disruptions.
At this juncture, central bankers are comfortable with transitory high inflation. But there are murmurs of taming the inflation as economic activities pick up the pace. Any premature attempt to curtail high inflation shall lead to higher interest rates, reduction in liquidity due to taper tantrums, and rise of the dollar index all leading to a certain risk-off trade in the world markets.
Additionally, a probable third wave is unknown territory. Investors can’t predict it and hence cannot time it.
Q) With markets at record highs have you increased or reduced your cash position compared to last month?
A) There has been no significant change in cash levels across portfolios in the last month. Unless we believe there’s a significant downside in the markets, we don’t raise cash levels.
Overall, we remain constructive on the markets and believe that the Indian economy will emerge stronger post the pandemic.
India will likely benefit by the culmination of diversifying supply chains by multinational companies in favor of India as well as from domestic cyclical recovery aided by reforms undertaken by the government over the last few years.
Q) Any sector(s) that are looking overheated. For example – brokerage firms such as Credit Suisse as well as JM Financial have reduced their weightage or downgraded metals post the rally. Do you have any specific sectors in which investors can reduce weight or avoid adding new positions?
A) We have a positive view on economic recovery and hence we see less worries on cyclical companies currently.
However, in the past year, investors being cautious in the pandemic may have overpaid for safety in some companies/sectors. Even if these don’t correct in price, they may experience time correction for some time.
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