We do expect another stimulus to come through, and this one should be more from the fiscal perspective, although the timing and the quantum both remain unpredictable.
There could be a correction going into the elections, but we do not expect it to be a material one. Based on our scenario analysis, we see a 5-7 percent downside from current levels and a potential 9-11 percent upside for the Nifty, Amit Shah, Head of India Equity Research, BNP Paribas, said in an interview with Moneycontrol’s Kshitij Anand.
Q) In your recent strategy report you have highlighted a portfolio made up of “BHARATH” stocks. What is the rationale behind this?
A) India’s inability to create businesses of global scale for the large part has resulted in what can be called "people-centric businesses".
In our view, the "BHARATH" basket of companies have either positioned themselves within the Indian market to be successful businesses of tomorrow or have had business models with the potential to touch a billion people.
We think such a reach enables them to withstand difficult business cycles and come out stronger as the competition around them struggles.Q) Do you also see another stimulus coming from the govt to lift the economy?
A) We do expect another stimulus to come through and this one should be more from the fiscal perspective, although the timing and the quantum both remain unpredictable.
We think the reason for the fiscal stimulus being delayed is that unlike other developed countries where they could afford more than one fiscal efforts to reinvigorate their economy, India’s fiscal situation allows it just one real fiscal push.
In the event it is not timed right or is unable to have the desired impact, it will result in a further delay in the economic recovery.
Hence, the government could be waiting to see some slowdown in the COVID-19 cases count before releasing its fiscal package.Q) The way markets are reacting to bad news it does seem like that the worst is over. But can we say that the worst is over amid the COVID pandemic?
A) You are right, it is difficult to say amidst a pandemic if the worst is over or are we just kicking the can down the road. I mean, are we just being hopeful for a better FY22 or the impact of the pandemic is going to be long-lasting?
We believe that looking at the high-frequency economic indicators that we monitor, there is a reason to cheer as on the ground data is improving.
We all have seen the strength in the agriculture sector, auto sales have been strong, rural unemployment is slowly reducing and the MGNREGA fund released by the government in the first five months of FY21 has reached 80 percent of FY20 level which should spur consumption.So as they say, it is not over till it is over, but the trend definitely is encouraging.
Q) Some experts feel that there could be some correction post US elections, and the same could flow down to emerging markets like India. What are your views?
A) I would differ here a bit. The biggest driver of the equity rally in EMs and India is the ample liquidity arising from the global central banks taking "whatever it takes" approach to address the economic slowdown on account of COVID-19.
In recent years, the US has been one of the best-performing equity markets in the world, largely on account of tech companies, but the performance was not mirrored across EMs and especially India.
Historically, US elections have not resulted in material volatility in the markets. Having said that, the current valuations both in the US and in India are above their five-year historical averages with the US being materially more expensive.
This time, the election would be a long-drawn affair on account of postal votes, and currently, the race between President Trump and Joe Biden is very tight.
As a result, there can be a correction going into the elections,but we do not expect it to be a material one. Based on our scenario analysis, we see a 5-7 percent downside from current levels and a potential 9-11 percent upside for the Nifty.Q) FIIs seem to be going all-in for Indian markets which is a positive sign for now. Do you think it is the near-zero interest rates across the globe, or we are genuinely looking attractive?
A) FIIs have been active in the Indian market, but they have been largely participating in deals. Hence, the August FII inflows were very strong due to a slew of deals, especially in the financials space.
Excluding the deals, FII participation has not been very exciting. The initial rally in the Indian markets was driven by retail investors, which was then carried forward by the global liquidity rush driven by near-zero interest rates, which eventually found its way to India and other emerging markets.
For now, at current market levels, we do not see any distinct advantage that the Indian markets have that make them more attractive compared with the rest of EMs.
Hence, we do not see a material downside as well as a material upside, but our bias still remains on the upside as we do not expect the liquidity-driven rally to wean off soon.Q) There is a lot of chatter around the dollar index which is likely to go down, how will that impact emerging markets like India? If Trump wins the election do you see a strong dollar and how that impacts equity markets?
A) The decline in the dollar index historically bodes well for the Indian equity markets as it gets more attractive for FII investors as they get higher returns on a per dollar investment.
In the event President Trump wins the election, we do not expect the dollar to strengthen materially especially in light of the huge fiscal stimulus (more than 10 percent of GDP) given by the US government which has resulted in the US fiscal deficit at 18 percent of GDP.
Also, the US debt is almost in-line with its GDP an event we have not seen since WWII. Hence, we expect USD to remain benign which bodes well for the Indian markets. It also helps that Indian dollar reserves are at record levels.Q) Your take on telecom and metals sector?
A) We have a positive view of the Indian telecom industry. Over the last year, industry revenue increased by 16 percent in a weak economic context, while the two large operators reported even higher growth. Over the next few quarters, we believe there is a scope for further tariff hikes.
Data has become an essential service for the consumer and we believe current below-cost pricing is unsustainable. Increase in ARPU is imperative; it is more a question of when than if. Also, if you see both Bharti Airtel and Reliance Industries are part of our BHARATH basket of stocks.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.