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DAILY VOICE | 2021 expected to be good year for EMs; Budget could be infrastructure-heavy: Neeraj Chadawar of Axis Securities

We would advise investors to build a long-term portfolio as the prospects for equity investment have improved.

December 29, 2020 / 08:05 AM IST

The policy reforms by the government are likely to continue in 2021, the market will consistently watch the development on the policy front. 2021 Budget is likely to be infrastructure heavy and  will decide the further roadmap of economic growth, said Neeraj Chadawar, Head - Quantitative Equity Research at Axis Securities in an interview to Moneycontrol's Sunil Shankar Matkar.

He feels 2021 is likely to be a good year for the emerging markets as FII inflows will continue on account of a weaker or stable dollar. Here are edited excerpts from that interview:

Q: 2020 will be remembered for the wild swings we saw in the market. What is your overall reading on 2020 and what is your outlook for 2021?

Equity markets have staged a major recovery across the world, Indian market has rallied a whopping 81 percent to 13,740 from the March low. 2020 saw a highly volatile time, with a lot of ups and downs in asset prices amid uncertainty grew due to pandemic. Overall we are ending the year with a positive note.

Further, the sequential recovery seen in the high frequency indicators, consistent FII flows, a weaker dollar, better than expected Q2 Earnings, optimism on the vaccine development, policy reforms announced by the government all favoring equities markets.

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Fundamentals are getting stronger for equity investment with business normalization in Q2 is ahead of street expectation; the earning scenario has improved with management commentaries reflecting higher degree of confidence in demand revivals. Two positive trends playing out in Q2: 1) Visible expansion in the margin across the board led by better control over cost by the management 2) Stronger than expected sales and volume numbers reflects stronger economic recovery. Current trend reflects that, earnings seem to be bottoming out, and recovery going forward will be faster.

In Nifty50 companies, 34 companies beat earnings expectations in Q2 by a reasonable margin. While a significant portion of the beat has been on account of better margins which is attributable to cost management but recovery of revenues has also been better-than-expectations. With the significant beat as a backdrop, we have raised our earnings estimates for FY21 and FY22 by 6 and 8 percent respectively, and introduced FY23 earnings. We arrive at the December 2021 target by valuing the Nifty at 20x FY23E earnings of 730 translating to our target of 14,600.

Q: Should one prepare for big selling pressure in the market in 2021 after witnessing fresh record high levels in 2020? Also given the current record high levels, should one book profits or wait for some more rally, though it is case to case basis?

Overall, the macro setup is positive for Indian market as economic activities are picking up with sequential recovery seen in high frequency indicators. Lower interest rate environment and higher fiscal spending will continue to support the equity market, Apart from this, the dollar may lose some strength on account of lower interest rates, emerging markets are the biggest beneficiary of a weaker dollar. 2021 is likely to be a good year for the emerging markets as inflows are likely to continue on account of a weaker or stable dollar.

The IT sector continues to see very strong traction. Accenture reported very strong deal wins which indicates that the deal wins for the IT sector will be very strong for the Indian companies also. The IT sector could see further re-rating. While the IT sector continues to see very strong tailwinds, the news for domestic pharmaceuticals has been a mixed bag. India growth in the Pharma sector was not very strong in November but overall trends for the sector continue to indicate revival. Commodity prices have continued to surge with copper and ferrous metals performing very strongly.

Market has rallied sharply in the last one month on account of stronger FII flows, and saw more than $9 billion of FII flows in the last one month. FII flows are likely to continue in 2021 on account of a weaker dollar. We would continue to advise sector rotation strategy to generate outperformance at current level. The small and midcaps are picking up steam and they should deliver solid returns in 2021 as economic uncertainties will reduce and volatility will decline. We believe volatility will decline significantly in 2021 which will lead to a small and mid-cap rally. However, one should keep 5-10 percent cash in hand to deploy the money at lower levels.

Q: What is your biggest lesson learned from 2020 and what do you want to avoid in the coming year? Also what is your advice to investors with respect to 2021?

The biggest lesson learnt in 2020 is that one needs to avoid concentration risk in the portfolio. Portfolios with higher equity allocation had seen a higher drawdown as compared to the well diversified portfolio. So, one needs to follow the proper asset allocation strategy to gain risk calibrated returns. 2020 saw a highly volatile time, with a lot of ups and downs in asset prices amid uncertainty grew due to pandemic. Volatility in the market is likely to decline in 2021 with reduction in economic uncertainties going forward. We believe small and midcaps are the biggest beneficiary of overall reduction in volatility. We continue to remain bullish on the mid and small cap theme and recommend more allocation in the space.

Q: Bank index corrected 4.5 percent in the year 2020, though it rallied 81 percent from its March lows. Do you expect the sector to act as a leader in 2021 after underperformance in 2020, why?

The BFSI sector was on backseat till October and outperformed the broader market with improved fundamentals in the month of November. Outperformance continued in December with improved outlook and with focus towards growth, we believe risk rewards are in favour for the sector. We believe outperformance will continue in upcoming quarters also.

Q3FY21 results for the BFSI sector will be very strong. Indications of stress in the banking system have emerged as some banks have indicated. However, the challenges still appear manageable. Focus for a bank has shifted towards growth as they are flushed with liquidity which is impacting margins. The overall setup for private banks for 2021 appears quite encouraging.

Q: Sectors one must add/avoid in 2021's portfolio?

Growth combined with value is a win-win proposition: Even as the Indian equity markets have reached an interesting point the market offers multiple plays. Value plays like Metals, Banks, NBFCs and others have started delivering solid returns but also the small and midcap space marked by discretionary consumption, retail, autos and others have delivered returns. Thus, the market is rewarding handsomely across both the themes. Hence, combination of the two themes continues to deliver the most rewarding returns.

Further, our case for two year rolling returns indicates that the market has turned in favour of small and mid cap stocks which are more reasonably valued and offer greater upside potential. We continue to remain bullish on the mid and small cap theme and recommend more allocation in the space.

Q: What are the key triggers for 2021?

2020 seen a strictest lockdown with shutdown of major economic activities, while 2021 will see complete opening up of the economy. 2021 will also see the vaccination theme playing out across the sectors. With the assumption of opening up the economy will open the new doors of growth engines which will likely to see upgrades in corporate earnings. Lower interest rate environment and higher fiscal spending will continue to support the equity market.

Further, 2021 is likely to be a good year for the emerging markets as FII inflows are likely on account of a weaker or stable dollar. Liquidity continues to be strong in the market and stimulus provided by the US congress will further provide downside protection. Further the policy reforms by the government are likely to continue in 2021, the market will consistently watch the development on the policy front. 2021 Budget is likely to be infrastructure heavy and will decide the further roadmap of economic growth.

Q: What are the risks in 2021?

Given the experience of 2020, one should avoid the concentration risk in the portfolio. We would advise investors to build a long term portfolio as the prospects for equity investment has improved. But, one needs to keep in mind that we are not completely out of the virus risk; which is still the concern for the economic recovery.

Currently, there are top ten vaccine candidates in phase 3 trials and vaccination can only be expected in the first half of 2021. Further, the current rally is built on the expectation of the sharp recovery in the corporate earnings; if recovery falls short then it could be a challenge for the market to sustain at a higher multiple.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Dec 29, 2020 08:05 am

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