Anil Sarin, CIO – Centrum PMS expects a global economic revival post-COVID, which will be reflected in stronger corporate earnings. Sarin advises investors to avoid lower quality stocks and keep chasing higher-quality stocks even at high prices, the valuation gap between quality top and lesser quality (or cyclical) stocks becomes too wide, he said in an interview with Moneycontrol’s Kshitij Anand.
Edited excerpts:
Q. The year 2020 which most of us want to write-off from our lives is coming to an end, but investors will be a happy lot as the market recouped most of the losses and probably will end the day with a double-digit return. What is your view on markets for the year 2021?
Markets have had a great year so far. We expect a global economic revival post COVID, which will be reflected in stronger corporate earnings. This is positive for global equity markets.
Added to that is the negligible (sometimes negative) yield in the bond markets, which makes investors willing to pay higher for even modestly higher growth.
Equities provide a higher earnings yield, hence the rising valuations of equities worldwide. Indian corporate earnings are already showing strong signs of growth, and it seems that COVID has only accelerated the formalization of the Indian economy.
The big corporate players are taking market share away from smaller and lesser organized SME players, resulting in rising margins and relatively stronger revenue growth.
There is thus a willingness to pay higher multiples for stocks of leading companies. In a nutshell, falling interest rates, ample liquidity, and rising corporate earnings are providing a tailwind to the equity markets, and we expect this momentum to sustain in the coming year.
That being said, every bull market has multiple sell-offs and drawdowns. Our current view is to use those sell-offs as buying opportunities.
Q) Equity mutual fund schemes seem to be losing ground as outflows continue for the fifth consecutive day in a row. What is leading to outflows and any specific reason for distrust among the investor community?
A) As the market becomes broad-based, all types of stocks start rising in price. Even those that may not have good long term prospects or those enjoying a short term cyclical rebound.
As professional money managers avoid lower quality stocks and keep chasing higher-quality stocks even at high prices, the valuation gap between quality top and lesser quality (or cyclical) stocks becomes too wide.
This undervaluation then provides an opportunity for quick trading gains. This gets further exacerbated when investors are working from home and have more time on their hands, and when low-interest rates make fixed deposits less attractive.
We believe such a phenomenon is currently playing out. Please note that such bottom-fishing is a regularly occurring phenomenon of every bull market.
This time around, more adventurous investors are cashing out their MF holdings to generate capital to play the bull market trading game.
Q) Budget 2021 will be an important event for the markets. What are your expectations from the Budget?
A) We do not have any specific expectations from the Budget perse. We only wish for more steps towards ensuring genuine ‘ease of doing business’, and a speedy and effective judicial system.
Both these are outside the ambit of the Budget, and we are seeing steady steps being taken by the government.
Q) What will be your advice to the first-time investors, and things they should keep in mind for the year 2021 as 2020 was just a one-way ride i.e. on the upside?
A) Our advice would be to avoid taking too much direct equity exposure and to avoid using leverage while making equity investments
Q) The primary market remains buzzing throughout the year 2020 thank to risk-on sentiment on D-Street supported by massive liquidity flows from FIIs. What are your expectations for the year 2021 – will the trend continue?
A) FII interest in Indian markets is impossible to predict. However, there is rising interest in all Emerging Markets (EMs), commodity prices are firming up, and the US Dollar index is weakening.
All these developments are supportive of greater outbound investments by investors in developed markets (like USA, Europe etc).
India should attract its fair share, depending upon its corporate earnings and policy decisions that support FII and FDI investments.
A) We expect India to have an economic revival in 2021. That should be supportive of Banks and NBFCs, infrastructure and materials (cement, steel etc).
In addition, if there is a capex revival, then capital goods stocks should also do quite well.
Q) FIIs poured in money with both hands in 2020 but will the momentum continue in 2021?
A) As mentioned, Predicting FII interest is next to impossible. A lot depends on ETF flows in developed markets in 2021. If those flows remain strong, then India will receive its fair share of FII inflows.
Q) What should be the asset allocation strategy of investors for the coming year?
A) For 2021, one should remain positive on equities. Real estate is showing signs of a nascent recovery, so one can plan for the purchase of self- dwelling unit. As far as bonds are concerned, one needs to watch the inflation figure.
If there is a sustained rise in inflation, then one should prepare to invest more in fixed deposits and debt MFs. Against the backdrop of an improving global economy, Gold is not expected to yield strong returns in the near-term.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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