Raghvendra Nath of Ladderup feels the sustenance of the market rally would depend on how the global economy recovers from the pandemic, and the current bullishness around the economic recovery may be slightly overstated as the growth drivers are still missing.
The benchmark indices rallied over 70 percent from March lows to hit a fresh record high. The broader markets also joined the bulls' party.
The Managing Director at Ladderup Wealth Management said September quarters earnings had a component of delayed demand which might have transferred from the last quarter.
Hence, he feels the real test of quarterly earnings would be seen in Q3 and Q4 of this year, which would set the momentum and expectations going forward.
Edited Excerpt:-
Q: Market had a strong run of 70 percent from March 23's low. Do you think the rally will continue?
Yes, the current rally has surprised everyone with the swiftness with which the recovery from March lows has happened. Probably, this is the fastest ever recovery from a bear market low. The rally has been primarily driven by liquidity as well as better-than-expected Q2 performance of the companies. The positive developments around the vaccines were taken well by the markets as we saw an uptick in all base metal prices with hopes on a global recovery. The sustenance of the rally would depend on how the global economy recovers from the pandemic. The current bullishness around the economic recovery may be slightly overstated as the growth drivers are still missing.
Q: Economic data points clearly indicated that there has been gradual recovery. But do you think there could be flat growth in FY21 and double-digit in FY22 due to the low base of the previous year?
It is highly unlikely that we would have a flat growth this year. While there has been a significant recovery, there are still a lot of sectors of the economy that are substantially impacted by the pandemic. My guess is that we may end FY21 with a negative 8-9 percent GDP growth number. FY22 does look promising due to the low base and the consistent recovery and double-digit growth is a possibility.
Q: What would be the real risks for the Indian as well as global economy over the next year?
The biggest risk to the global economy still is the sustenance of the coronavirus. Any vaccination drive, however strong, will still take years to have a significant impact. Countries and people learning to live with the virus and going back to normalcy is a higher possibility.
How the United States changes its trade policy, taxation, and economic stimulus under the new administration would be key factors from a global sentiment perspective.
The economic stimulus given by various countries has ballooned the balance sheet of the central governments. If we are not able to sail through the current environment effectively, there could be a far deeper and longer recession in play. Adding to these, the next year is likely to witness the outcome of BREXIT and US-China trade negotiations which will keep the markets on its toes. Overall, we might see a turbulent year ahead.
In India, private sector investments have been really low over the past few years. While the government has come out with a slew of initiatives, how do they drive up private investments would be a key thing to watch. Inflation is another risk that India has to contend with. After 5-6 years of low well-managed inflation, suddenly we are witnessing high inflation.
Q: India seems to be a favourite country for FIIs nowadays due to economic recovery and western countries facing COVID-19 pressure. Do you think the FII inflow will continue?
India has been an attractive destination for FIIs as the Indian markets have depth and are well regulated. The recent flows into the market are more to do with adjustments in the MSCI index as well as a flood of liquidity globally. Though the passive flows might continue, it is unlikely that fresh inflows will continue with the same momentum in the short-term. The growth story of India remains intact and hence over the years, FII will continue to invest in the country.
Q: Do you think India will become a major manufacturing hub in the coming years, though there is competition from other countries like Indonesia, Bangladesh etc.?
It is highly unlikely that India becomes a major manufacturing hub in the next 10 years, as things stand today. We cannot depend solely on foreign companies coming into India and setting up manufacturing bases as we lack the ecosystem. While there are certain segments where we have decent infrastructure like automobiles etc., in most industries we lack global scale.
Creating global scale is a function of capital investment, liberal lending practices allowing leverage to setup large greenfield projects, environment to develop technologies or at least access to it, consistency in government policies and taxation and finally removal of bureaucratic shackles.
While successive governments have made efforts, there is a lack of cohesion of response. Countries like Indonesia & Bangladesh focused on a few sectors and created a good export base. The current PLI scheme of government is a step in the right direction as it is incentivising global players to set up bases here. But the scheme should be followed up with more such initiatives at the local level as well. For any large manufacturer, development of vendors for the components is an extremely important factor for the decision to locate their plants.
Q: What are those sectors look attractive on the global front and can majorly be a part of India's exports in the coming years?
Information Technology is an evergreen sector and few years down the line we might see Indian companies in the tech enabler space. The chemical and speciality chemical sector has been gaining traction because of its asset-light business. The pharma companies have shown their manufacturing capabilities in the lockdown by supplying medication all over the world. Textiles is another sector where India can really shine, with some amazing local art & craft as well as being the largest producer of cotton.
Q: Do you think September quarter earnings indicate strong earnings growth in the coming years?
September quarters earnings had a component of delayed demand which might have transferred from the last quarter. The real test of quarterly earnings would be seen in Q3 and Q4 of this year. It would set the momentum and expectations going forward.
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