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DAILY VOICE | Evergrande-led correction an opportunity for investors to deploy money as domestic factors remain strong, says Shailendra Kumar of Narnolia

Till now Evergrande issues look localized and Chinese policymakers should be able to handle them out using steps like restructuring.

September 23, 2021 / 08:15 AM IST

Shailendra Kumar, Chief Investment Officer at Narnolia Financial Advisors feels till now Evergrande issue looks localised and Chinese policymakers should be able to handle it using steps like restructuring.

So the correction would be an opportunity for investors to deploy money as it is not due to Indian economic factors or corporate earnings, said Shailendra Kumar, who has experience of over two decades in fund management and investment advisory.

Recently, Chinese real estate developer Evergrande, the most indebted real estate developer in China with over $300 billion of loans, warned investors that it could default if it's unable to raise money quickly.

He believes Indian economy and Indian equity market is set for exciting times ahead. "While global trend of digitalization is megatrend favouring Indian economy, domestically, formalization is another megatrend adding further positivity to Indian equities." he said.

Edited excerpts:

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Q: Evergrande crisis rattled investor sentiment globally. Do you think it will be a bigger cause for correction across the globe, including India, in the coming days or it is a short-term concern?

Indian equity market has rallied sharply over the last year and there had been no meaningful corrections and that surely makes our market susceptible to negative news flows. Till now Evergrande issue looks localized and Chinese policymakers should be able to handle it using steps like restructuring. What makes the situation tricky is that Chinese policymaking over the last few months has become highly unpredictable with steps like, regulating large tech businesses, education and gaming.

On a relative basis, this makes the Indian market even more lucrative. Also, we should remember that the correction coming in the market right now is not due to Indian economic factors or corporate earnings and so the correction would be an opportunity for investors to deploy money.

Q: Lot of reforms including telecom, auto and banks announced recently. Do you expect more such reforms in the coming days that can really boost confidence of market participants?

Series of welcome measures have been taken over the last few years in the Indian economy that will trigger robust growth for Indian businesses for the years to come. What we need now is to improve our current ranking of 163rd place among 190 countries when it comes to enforcement of contracts. This judicial reform is important for India to achieve a better ranking in ease of doing business.

Q: Considering the expected economic & earnings growth, do you think the BSE Sensex and Nifty can be doubled from current levels by 2025?

Doubling in next four years require 20 percent annualized growth. Indian equity on a long term basis has grown at 15 percent annualized rate. But India looks set to produce higher than long term growth for next few years. Indian retail investor in recent past has come in large numbers to the market and these are not speculative but long term investment money and are expected to remain sticky for foreseeable future. At the same time, global institutions have to do a lot of catch up. In a post pandemic world, Indian economy and policies have shown strong resilience. At the same time, China story is showing clear sign of fatigue if not reversal. Foreign Institutions owns $600 billion of Indian equities but in terms of their total asset it is mere 0.2 percent and that should see a sharp upward move in the years to come. Indian economy is 3.5 percent of the world GDP and provides a fast growing diverse sector opportunity to invest in.

Q: Crude oil prices hovered around $70-75 a barrel for last several weeks. Do you expect the oil prices to cross $100 a barrel in coming one year with the completion of vaccination across the globe? Do you see any major impact of electric vehicle segment progress on oil prices?

Crude prices currently is highly dependent on news flows around its supply. Demand growth globally for fossil fuels will remain tepid but with environmental concerns taking centre stage its supply will also see tepid growth. A look at long term price history suggests that when demand is the driver, price firmly trades higher but when supply is key driver of the price, price stays largely sideways with few short lived sharp rallies. Important to note here is short lived rally as one source of supply will very soon be compensated by some other sources. So crude on average will remain sideways for a long time now with occasional short lived rallies.

Q: Several experts expect the bullish trend to continue for atleast next couple of years to four years. Do you agree with their view and why?

Indian economy and Indian equity market is set for exciting times ahead. While global trend of digitalization is megatrend favouring Indian economy, domestically formalization is another megatrend adding further positivity to Indian equities. Just as the world is highly dependent on China for manufactured goods, the world is increasingly becoming dependent on India for all things digital. India produces 16.3 lakh engineering graduates each year way ahead of other nations like China, US, Russia and these engineering graduates are behind the digital transformation of the global economy. Digital space will gradually become larger percentage of world GDP gradually and India is a clear beneficiary here.

Simultaneously Indian economy is witnessing another megatrend in terms of formalization. Large formal companies in India with more than $500 million revenue constitute about 48 percent of GDP currently. This is set to increase to 78 percent going forward. If we look at any industry in India the market share is continuously going up for formal players of that industry. And this formalization trend favours the stock market as these large formal companies are part of the stock market.

Q: Metals sector was the biggest outperformer in FY22 so far with 44 percent gains. Do you think the rally can extend further in coming weeks or is it the time to be cautious on the segment?

The current rally in metal prices globally is a supply side issue and not demand side and so the scope of sustenance of the current trend in the commodity price is limited. From now on Indian metal stocks performance will be more a function of domestic demand scenario. My sense is that easy general money making opportunity in metal stocks is over and one needs to be very stock specific.

Q: What is your view on Federal Reserve policy meeting?

US Federal Reserve is expected to start some form of tapering by the end of 2021 and once that happens market will see some reversal but I believe that would be a good buying opportunity for Indian investors. We must also remember if on the one hand monetary tightening in terms of US Fed tapering is coming at the same time almost 6 trillion dollars of fiscal push is also expected and that would ensure enough money on the table for financial markets to remain buoyant in a medium term sense.

Q: With the chip shortage issue be a spoiler for auto sector in current festive season? Is it the time to add these stocks portfolio?

Auto is the only major sector that has not participated in the current equity market rally. In fact, consumption as a theme is major underperformer. Some consumption stocks have rallied but those are from industries where informal to formal value migration is happening. Auto companies in the last 3-4 years have seen tepid sales and poor stock performance. We expect auto sales to see a cyclical upswing from the second half of the next calendar.

Q: The equity mutual funds flow dipped sharply in August to Rs 8,666.68 crore but SIP inflow jumped closer to Rs 10,000 crore. Do you think the volatility will continue in equity MFs inflows in coming months?

Indian retail has shown a higher risk appetite by going direct route more aggressively than going through mutual funds and that is the key reason behind the erratic pattern of fund flows to mutual funds. The number of depository accounts with CDSL grew by 83 lakh in 2020 while earlier this used to be 26 lakh only. During the early days of a bull market what takes the market higher is cheaper valuation of the preceding bear market and that was the case during the summer of 2020. Low valued, cheaper stocks are always fancied by retail. And as those stocks rallied heavily last year, retail become more aggressive in their direct investment. But as bull market matures and good quality stocks become the key drivers of equity price gains, performance by mutual funds will be better than direct equity investing and that will be bringing back the retail flows toward equities.

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: Sep 23, 2021 08:15 am

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