Ajay Menon - CEO, Broking & Distribution, MOFSL, feels that the pace of vaccination assumes critical importance and will provide comfort for FY22 economic growth recovery only once it reaches a certain threshold. If the pace doesn’t pick up fast, then the risk of third wave increases.
Menon has a rich and diverse experience of over 23 years in the equity market. He has been the cornerstone of MOFSL’s strong track record and a driving force behind the operational excellence of the group.
In an interview with Moneycontrol's Kshitij Anand, Menon said that it is advisable to remain fully invested. One should keep on reviewing his portfolio from time to time and churn it from overheated stocks to more comfortable names as per his investment style, rather than sit on cash.
Q) Market hit fresh record highs (matter of days). What is your outlook on markets for 2021?
A) The Nifty50 has breached its previous all-time high of 15,431 recorded on February 21 to touch a new all-time high above 15,700 for the first time in June.
After 2-3 months of consolidation, the month of May finally took the lead with MoM gains of 6.5 percent vis-a-vis near lull phase spread over the previous two months [March +1% & April -0.4%].
Comfortable Liquidity (due to lack of avenues to deploy) globally and the strong commodity cycle (metals, sugar, agro chemicals) took the market to a new high.
The global cues have been positive as reopening of economies in western countries and encouraging economic data points towards a quick global economic recovery.
Further, the pledge by the U.S. Federal Reserve along with a host of other Central Bank policymakers to keep monetary policy loose despite the recent signs of an uptick in inflation has abated the concerns so far.
Even domestically, with fresh cases subsiding continuously, investors are upbeat about the unlocking of the economy in June which will help revive commercial activities.
A healthy earnings season with strong growth momentum also lent support to the market. Hopes of further stimulus by the government is also bolstering investor confidence.
Thus, as the 2nd Covid-19 wave continues to recede in India and the pace of vaccination picks up, we expect the long-term fundamentals to remain intact and the journey to becoming a little smoother.
Q) What are the key risks that the Indian market faces in the year 2021?
A) Firstly, the pace of vaccination assumes critical importance and will provide comfort for FY22 economic growth recovery only once it reaches a certain threshold. If the pace doesn’t pick up fast, then the risk of third-wave increases.
Secondly, the expectations for FY22 earnings are running high at 30%+ growth in Nifty FY22E EPS. Given the rich valuations, any misses on FY22 earnings delivery may act as a dampener.
Thirdly with the sharp run-up in commodity prices globally, the risk of inflation has increased manifold. High inflation would lead to higher interest rates which could be negative for equities.
The rise in prices comes amid an increase in COVID cases and restricted economic activity. With the uncertainty in the demand environment, it would prove challenging for companies to pass on the rise in commodity costs.
Q) Market is focusing on the unlock trade. But, will the scenario pan out exactly similar to what we saw last time considering that was total lockdown and we are in partial lockdown?
A) India’s pace of vaccination has picked up over the past few days and has reached an average of 30 lakhs per day. So far more than 21cr people in India have been vaccinated.
The Govt. is also focusing on increasing the vaccination drive by allowing new entrants and also increasing the production of the existing players.
Thus, with fresh cases having declined substantially to ~1.3lakhs/day from its peak of 4lakhs/day in Apr’21, it is inspiring more confidence to people to get out and take plunges as vaccine sourcing is also improving.
The states are gradually unlocking the economy in a phased manner and as the vaccination drive picks up further in the coming months we feel that the economy will gradually come back to normalcy.
Globally, we have seen that in countries that have almost completed vaccinating their population, the reoccurrence of infection has been minimal.
The majority of the developed nations have successfully conducted the vaccination drive and is now fully geared up to reopen the economy including travel and tourism.
Thus India will also be able to return to normalcy in few months as the vaccination pace picks up in 1-2 months’ time.
Q) What should be the ideal strategy now – should one book profits and then deploy cash at lower levels?
A) It is never advisable to sit on cash as one can never time the market. It may turn out that one may miss the bigger rally while waiting for the correction to take place.
Thus investors should keep booking profit intermittently but should stay fully invested. Though the markets have touched new lifetime highs and valuations are slightly on a higher side, but still, the long-term fundamentals remain intact and thus the market may not witness large corrections.
An investor should rather focus on asset allocation and build a diversified portfolio to navigate through any volatile or bearish phase.
Q) Which sectors likely to lead the next rally on D-Street? Time for sectoral rotation and look at sectors that remained underperformers?
A) The sharp recovery in the global economy and the government push towards higher investments into the economy has led to some of the cyclical sectors doing well in the last few months.
Also, the unlock trade is playing out well. The market is witnessing rotation from high PE stocks to cyclical/value plays. This apart – the capex cycle is also expected to pick up in FY22.
Thus from the next 12 months' perspective, apart from being positive on IT, BFSI, Healthcare, we also prefer some cyclical within Metals, Cement, Cap Goods, Oil & Gas, and PSU space.
The IT sector is likely to sustain double-digit topline growth in the medium term, led by larger deals on a full-scale Digital transformation, projects focused on increased workplace management, and higher spend on Cloud migration by large corporates.
The Healthcare/Pharma space will continue to be in focus as sharp rise in Covid cases is leading to increased demand for various medicines including vaccines and medical services.
We are positive on the BFSI space given strengthening economic recovery and the progress being made in improving asset quality. This would aid the strong rebound in earnings as the credit cost moderates.
Q) With markets at record highs have you increased or reduced your cash position compared to last month?
A) As mentioned above, it is advisable to remain fully invested. One should keep on reviewing his portfolio from time to time and churn it from overheated stocks to more comfortable names as per his investment style, rather than sit on cash.
From the lows of 7,500 in Mar’20, the markets have come a long way in the last 1 year and if the investor would have kept some portion in his portfolio as cash, then he would underperform in a big way as compared to one who took the risk and is fully invested in the market.
Thus we advise investors to churn their portfolio towards cyclical and capex recovery theme along with demand revival post unlocking of the economy.
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) There has been smart rotation of sectors for the past 12 months and it would be tricky to take a call on a sector purely on the basis of valuations as we are in the midst of revival cycle.
Q) Companies or stocks which stood out in the March quarter earning seasons according to you?
A) The 4QFY21 earnings season has maintained the momentum of the 3QFY21 results season - aided by the deflated base of 4QFY20 and healthy demand recovery for the large part of the quarter – as attested by high-frequency indicators.
IT continued to post strong performance, with robust deal wins and order book. Cement companies' results have been impressive, with robust EBITDA growth, driven by a) strong volume growth, b) higher realization growth, and c) decline in total cost per ton – due to higher operating leverage.
Cash flow generation has also remained strong during the quarter, helping in the deleveraging the balance sheet. Among Banks, Axis Bank, ICICI Bank, IndusInd Bank and SBI results stood out with sharp improvement on asset quality front.
The healthy performance is also attributable to moderation in slippages and improved disbursements/collection efficiency. In metals, Tata Steel saw massive deleveraging in 4QFY21 on strong FCF generation.Disclaimer
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