"The biggest relief for the markets in 2020 that commenced a fresh bull run (after a brief bear phase around March) was that economies started unlocking around the middle of the year, with coronavirus showing signs of being contained," Unmesh Kulkarni, Managing Director Senior Advisor at Julius Baer India said in an interview to Moneycontrol's Sunil Shankar Matkar.
Q) After more than 12 percent rally in 2020 and 80 percent upside from March lows, do you think the market can give a double-digit return in 2021 too?
A) One has to view the 2020 market performance of the Indian markets in a relative as well as a historical context, in order to get the full picture. While the rebound of the Nifty50 from the March lows has certainly been stupendous (82 percent, as of December 28), the overall calendar year return is 14 percent, which is not alarming.
Although the Indian markets caught up well in Q3/Q4 of 2020, India has underperformed (YTD CY20) some of the global markets (S&P 500: +15.6 percent, Nasdaq Composite: +43.8 percent, Taiwan: 20.6 percent, Korea: +27.8 percent).
If one were to gaze into a crystal ball for 2021, one would notice some key developments taking place, in India and around the globe:
- Multiple vaccine rollouts gathering momentum and covering a fairly good proportion of the population of several countries;
- Global markets continuing to be flushed with liquidity (although reducing incrementally);
- Central banks keeping interest rates low to support their economies;
- Global economies starting to make a smart comeback, after being plagued into recession for the most part of 2020;
- The US Dollar likely to remain weak for some more time (as inflationary expectations build up in the US), which should support flows into Emerging Markets. India too is likely to see sustained FPI flows into equities;
- Commodity prices heading up, which is generally a sign of a pick up in economic activity.
All these factors suggest that equity markets have a lot to look forward to in 2021. The current bull market is likely to extend to 2021 as the global economies (including India) see normalisation over the next 6-12 months. Investors, globally as well as in India, are currently under-invested in equities, not having expected the current market rally to sustain, and with interest rates being at all-time lows, this liquidity is sooner or later going to find its way into risk assets, including equities.
However, given the sharp run-up in Q4CY20, a low double-digit return would be the base scenario for the Nifty50 in CY2021. At an index level, expectations need to be tempered; however, we expect 2021 to present stock-specific opportunities as well as sector/theme rotation opportunities, as the market recovery becomes more broad-based. Cyclicals, for instance, could lead the market performance in 2021.
The road ahead for equity investors can, however, can be choppy, given that a lot of expectations are already priced into the markets. A 10-15 percent pullback in the markets can be a very probable scenario, more likely in the early part of 2021 than later. Any delay in vaccine rollout or containment of the coronavirus, slower than expected normalisation of the Indian economy as well as earnings, sticky inflation prompting the RBI to withdraw some of the domestic liquidity and any further worsening of the domestic fiscal situation prompting FPIs to go slow on India (apart from geo-political and US-China trade tensions) could be some of the imminent triggers that may shave off some of the excess returns enjoyed by the markets over the past couple of quarters.
Q) What are your key expectations from the Budget this time?
A) Budget 2021 assumes a fair bit of importance, given that it is the first Budget after the devastating COVID-led impairment of the economy in 2020, and therefore there are growing expectations that the Budget will focus on rebuilding the economy and placing it back on the long term growth trajectory.
The focus of the Budget is likely to be on providing the much-need boost to growth and investment. Given the muted expectations around private investment, as corporates struggle to come out of the pandemic, the government will be required to act as the catalyst for growth, through increased spending as well as additional reforms. The Finance Minister has recently dropped some hints in the media about Budget 2021 being like no other Budget in the past and will help India emerge as the engine for global growth.
In the pandemic backdrop, healthcare is likely to be one of the focus areas in this Budget. Besides, education, rural development and infrastructure are some key areas that will probably draw the government's attention. Public spending on infrastructure is seen to be a priority area for the government, with the aim to put the economy on a sustainable revival path.
The 'Make in India' programme is likely to gain significance in the Budget, with the government possibly looking at boosting foreign investment in manufacturing, electronics, automobiles, etc.
The task ahead is certainly daunting and monumental, given the challenging fiscal situation. The government is expected to fast-track the disinvestment programme, which was severely hit due to the pandemic-led collapse of the economy in 2020. Besides, with the immediate need for government spending, it may seek to deviate from the fiscal consolidation path for a year or two.
Q) PM Narendra Modi said India received a record FDI in 2020 despite the pandemic and kept $100 billion target for the next 2 years. What is the FDI amount in 2020 so far and what were those sectors that attracted FDI? Do you expect more FDI in 2021 than in 2020 and in what sectors?
A) As per the reported numbers, the FDI equity inflows in the first half of the current financial year (April to September) were about $30 billion, which were 15 percent higher than the corresponding period in FY20 (23 percent higher in rupee terms). Almost 80 percent of the FDI equity flows came in the second quarter (July to September), which was quite natural, given the devastating COVID-shock experienced in the first quarter of FY21.
The services sector was the key beneficiary of the FDI in 2020, followed by Information Technology and Telecom.
Sustained momentum of FDI flows is very much on the agenda of the government. The call for attracting FDI flows has been sounded out from the very top, with the Prime Minister himself making a strong pitch to foreign companies to take advantage of the stable tax regime and attractive FDI policies in India, as well as positioning India as a hub for global manufacturing, in the aftermath of the pandemic.
Apart from the services sector, the Finance Minister is expected to keep the foreign investment as a key priority in the 'Make in India' initiative, especially in sectors/companies in the areas of manufacturing, electronics and automobiles.
Q) What are those expected key risks (global as well as domestic) for 2021? Do you think coronavirus will still be a major concern going into 2021?
A) While the ensuing recovery in global economies presents opportunities for equity investors, there are enough uncertainties that will keep markets on the edge, as we head into 2021.
First and foremost, the biggest relief for the markets in 2020 that started the fresh bull run (after the brief bear phase around March) was that economies started unlocking around the middle of the year, with coronavirus showing signs of being contained. Even now, despite the second wave in the western world (and a third wave in the US), expectations of a successful vaccine rollout across the world bringing the virus under control have led to markets scaling higher altitudes.
Any development that challenges this premise would be the biggest risk to markets. For example, delays in the vaccine reaching major parts of the population, or vaccine efficacy not turning out to be as expected, whether with respect to the original virus or new strains emerging across the world. Such an eventuality would prompt nations to again run for shelter through partial lockdowns, etc., which could cause jitters in the stock markets, which are already pricing in a lot of positivity emerging from the vaccine rollout.
Another major factor that catapulted the markets to such heights was the unprecedented liquidity that was pumped in by the governments and central banks around the world, along with massive rate cuts and loose monetary policy. A large part of this liquidity has gone into financial assets, creating asset bubbles, which the central banks would be keeping an eye on.
On the other hand, inflationary expectations have also started picking up; India too has witnessed high CPI inflation for the most part of the year. While the US Federal Reserve has pledged low interest rates for the whole of next year (and the RBI too treading on similar lines), a sustained build-up of asset bubbles or growing inflationary expectations could very well prompt the Fed (and/or the RBI) to roll back some of the liquidity measures. For instance, the RBI may even choose to partially roll back the emergency rate cuts of 2020, sometime in the second half of 2021. This could potentially create volatility in the markets akin to what we witnessed in 2013, with the famous ‘tapering’ of the Fed’s quantitative easing.
Fortunately, the other imminent risk of Brexit seems waning off, with the pre-Christmas announcement of the deal between the UK and the European Union. However, US-China trade standoffs cannot be ruled out, despite the change in government brought about by the US elections.
Domestically, the key monitorable will be the overall recovery in the economic environment and corporate earnings, as the markets have already started pricing in a healthy growth trajectory. Hence, any disappointment on the earnings front can pose a risk. Besides, any sharp increase in crude oil prices beyond USD 70-75 a barrel (although not our base case currently) can weigh on the country’s finances and corporate profitability.
Q) What is your view on the global economy for 2021? Do you expect further stimulus measures?
A) The development of an effective vaccine increases the prospects of a broad-based recovery in global economies. Pent-up demand from consumers who have increased savings rates substantially as well as a normalisation in investment spending should continue to drive growth from still relatively low levels. Besides, central banks (both the Fed and the ECB) have pledged their commitment to support growth. We expect the Fed to keep its policy flexible and maintain an overall supportive stance. The ECB has acknowledged that the latest lockdown measures will dampen growth in the short term and the current recovery would be paused in the next couple of months, before gaining traction later in 2021. Accordingly, the ECB has increased its Pandemic Emergency Purchasing Program by EUR 500 billion and committed to continue buying assets until March 2022.
The US Congress has just approved a $900 billion stimulus package, which is somewhere in between the asks of the Republicans and the Democrats. The announcement of this stimulus package amidst heightened negotiations reduces the need and the possibility for additional stimulus in 2021. Besides, the start of vaccination will also create some uncertainty around the announcement of future stimulus measures by the Fed.
Incrementally, going into 2021, global equity markets will have to reduce their expectations around stimulus measures and rather track the success of the vaccination, the normalisation of the economies (particularly US and Europe) as well as the continuation of policy support from the global central banks.
Q) What kind of opportunities and threats stand infront of India in 2021?
A) India has so far recovered well from the severe pandemic, which seems to have peaked out in the country in September. Although there are persistent risks of another wave, particularly with the western world still battling fresh cases and the UK discovering a new strain of the virus, the country is more vigilant and much better prepared today to deal with a resurgence in cases. Besides, the rollout of the vaccine in the country is quite likely around the corner.
Given this background, we should expect a continuous improvement in the economic activity in 2021, including some of the stressed sectors that suffered badly in 2020 owing to the intense lockdowns. The corona-prone sectors such as hotels and hospitality, entertainment, retailing and aviation are likely to see their prospects pick up, although it may take some time to attain pre-COVID levels. Other industries have already started picking up since the commencement of the unlocking, and we expect them to gain further momentum in 2021, as more and more people return to work in the new year. The key beneficiaries of an upturn in economic activity would be cyclical sectors such as Banking, Industrials, Auto, Real Estate, Building Materials, etc.
Healthcare will also continue to be an area of focus going forward, with most of the concerns ailing the sector now behind us, and the sector is expected to witness steady growth. Our preferred sectors for 2021 are Financials (Private Banks + Insurance), Telecom, Healthcare, Chemicals and Consumption, while we would also keep Cyclicals on our radar and watch for any sustained improvement in the capex / investment cycle.
On the other hand, if the COVID situation in the country were to really worsen again to alarming proportions, along with a delay in vaccine rollout, it could prompt states to re-introduce partial lockdowns, travel curbs and social distancing norms. This would undoubtedly dent the recovery process and further delay revival of the stressed sectors and require prolonged support from the Government and the RBI. In such an eventuality, markets may again seek shelter in some of the defensives and high growth companies in the healthcare, IT and consumption space.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.