DAILY VOICE | India is on a cusp of multi-year growth revival; demand recovery expected by Diwali: Harshad Borawake of Mirae Asset

Bulls remain in control of D-Street and every dip is getting bought into. What is your outlook on markets for the year 2021?

The equity markets generally tend to be the leading indicator and hence to that extent, the current resilient markets imply investor optimism on the future corporate earnings, in our view.

Before coming to the outlook, it is important to set the context. The economy last year was impacted by COVID wave and while it was recovering, it once again got hit by the second wave.

The respite is that the current lockdowns are not severe as the last year and vaccination coverage is increasing along with falling positivity rates. Thus, we can expect normalisation sooner than later.

While, it is always difficult to predict, more so for the short term, we believe that India is at a cusp of multi-year growth revival given the multiple drivers which will lead to mean reversion in growth rates.

These include low-interest rates, acceleration in manufacturing exports, buoyancy in the rural sector, consolidation toward stronger players, etc.

The remaining calendar year can potentially see positive news flow on all fronts - vaccination will ramp up and therefore consumer spends on goods and services will return to normalcy, albeit at different paces.

While the current wave will impact the 1QFY22 earnings, we expect strong earnings recovery and consensus estimates for Nifty indicate ~22% earnings CAGR in the FY20-23 period.

Support from the improving global economy helping exports, as well as the lower interest rate and expected normal monsoons, augur well for the economic recovery and market from the medium-term perspective.
Which are the key risks Indian market faces amid the Bull Run?

The extent of the impact of the second wave will be critical in the near term. The other risks to watch out for would be crude oil prices and if any abrupt increase in the global cost of capital.

What is your take on RBI policy? How long can RBI keep interest rates low?

The MPC, as expected, kept the policy rate and stance unchanged. RBI is rightly focussing on growth, rather than being overly worried about supply-led inflation.

Their approach of keeping sufficient liquidity does significantly help in lowering the unnecessary risk aversion amidst the pandemic.

The scope for RBI to keep rates low for some time is quite high, given the still relatively weak domestic credit cycle and also low global cost of capital.

Now, the focus will be on the supportive government measures, monsoon, channelising the liquidity to the real economy and its impact on the high-frequency data points.

What is powering rally in capital goods, utilities as well as oil & gas space? These 3 sectors were top sectoral gainers in May?

The one common factor in these sectors was a very comfortable valuation. While each sector's dynamics are different, given the Business to Business nature, their earnings are relatively resilient as against some other sectors which were significantly impacted by the lockdowns.

The improvement in the working capital and expected revival in the private CAPEX augurs well for capital goods.

While overall economic revival, strong commodity prices, electrification, incentives for manufacturing are some of the positives for utilities and oil & gas sectors.

What should be the strategy of investors at a time when markets are trading in unchartered territory? Should they put money lump sum or in parts?

We would advise investors to avoid timing the market and invest in a disciplined way in equities for the long-term within their earmarked asset allocation (based on one’s risk profile).

Mutual Funds are a proven vehicle to create sustainable wealth in a risk-adjusted basis, given its past performance, liquidity, transparency, and cost considerations.

In the current market scenario, staggered investments through SIPs or STPs would remain the best ways to invest in equities.

Will crude above $70 or $80/bbl hurt the economy and markets? Which sectors are likely to get impacted the most?

While the current crude levels of ~USD70/bbl are still in the manageable level, India’s higher crude oil import dependence puts stress on the country’s import bill as and when the oil prices rise.

However, in earlier years, auto fuel deregulation does not burden the exchequer and impact the government’s infrastructure spending plans. On the other hand, the higher oil prices would imply better global growth and in turn, would also help India’s exports.

Coming to sectors, the higher oil price would have an indirect inflationary effect on the economy and directly impact the sectors with oil-linked input costs like aviation, paints etc.

However, the final impact will be the function of demand revival and the ability of the companies to pass on the oil price hikes.

Any contra trade with respect to sectors which you think could play in the next 6-12 months?

In portfolio management, we have been following a two-pronged approach – it is a sort of barbell strategy. First priority is to buy high-quality businesses and at the other end of the spectrum, we are also participating in “deep in value” businesses.

Nevertheless, all stocks in the portfolio are chosen through a bottom-up approach, while keeping cognisance of the sectoral benchmark weights.

We are positive on discretionary, financials which would benefit in the recovery period and some relatively stable sectors like Healthcare, IT along with some B-B businesses and few value names.

Do you see demand revival by Diwali?

A) Historically, the Indian economy has always done well in the second half of the financial recovery as many festivals are celebrated in this period.

As the things stand now, increasing vaccination and falling positivity rates is positive and expected normal monsoon should give necessary support to the rural economy.

As said earlier, lower interest rates and support from the global economy is a good combination for economic revival and one can optimistically expect demand revival by Diwali.

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