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Emerging markets led by India, China likely to grow faster than developed markets, says Hemant Kanawala of Kotak Life

If there is disappointment in any quarter on earnings or corporate commentary turns cautious, then markets can correct to adjust to the new reality, says Kanawala.

December 30, 2020 / 10:04 AM IST

Hemant Kanawala, Head– Equity, Kotak Mahindra Life Insurance Company, says the global economy is expected to grow at around 5 percent in 2021 as economic activity normalises. Emerging markets led by India and China are expected to grow faster than the developed markets, he says.

The government needs to bring back “fiscal discipline”, which was relaxed to meet the challenges posed by the coronavirus outbreak. The government should also focus on capital spending to revive investment growth and to shore up the economy, Kanawala says in an interview to Moneycontrol’s Sunil Shankar Matkar. Edited excerpts:

Q: After rallying more than 13 percent in 2020 and 82 percent from the March lows, can the market give double-digit returns in 2021 as well? Should we prepare for a major correction—around 10 percent—in the short term?

Equity markets corrected sharply in March as the lockdown announced to counter COVID-19 infection raised the possibility of a prolonged economic recession. However, due to prompt action by the central bankers and the government by providing the required stimulus helped to limit the damage. As the government started lifting the lockdown, the economy started normalising and revenue recovery took place. This, along with the cost-cutting initiatives taken by the corporates, ensured that earnings didn't collapse.

The consensus is expecting 10 percent growth for the Nifty50 in FY21. In that sense, one may argue that CY20 returns are in line with earnings growth. The consensus is expecting high double-digit growth in FY22 and FY23. The Nifty is trading at P/B of 3.9, which is very close to its post-GFC high of 4. Hence, the probability of returns from further rerating of the market is low. So investors should expect returns in line with earnings growth in 2021. However, if there is disappointment in any quarter on earnings or the corporate commentary turns cautious, then markets can correct to adjust for the new reality.


Q: Is Budget 2021 going to be as important after a slew of measures announced in the last nine months? What are your expectations from the budget?

The government in the last few years has been making significant policy announcements outside of the budget. In that sense, the importance of budget from the economy and market point of view is limited. With the rollout of GST, indirect taxes are modified by the GST council. The budget is a statement of government financials and hence, the key focus area for the budget will remain on fiscal deficit and the government's priority for spending.

Normally, a high fiscal deficit is associated with higher inflation and consequently higher interest rates. Since 2014, the government has tried to keep the fiscal deficit in the range of 3 percent. However, due to the pandemic, the government relaxed its fiscal discipline. The government should indicate the roadmap to bring the fiscal deficit back to 3 percent. Also, the government should increase its focus on capital spending to revive investment growth.

Q: Prime Minister Narendra Modi has said India received a record FDI in 2020 despite the pandemic and has set a target of $100 billion for the next two years. How much FDI has come in 2020 and which are the sectors that gained the most? How will 2021 pan out?

India received $43.5 billion FDI in the January to September 2020 period. Most of the FDI has been in the services sector like finance, software and telecom. With the government giving fiscal incentives for boosting manufacturing in India through production linked incentive schemes (PLI) in mobile manufacturing, pharmaceutical and automobile sectors, it can be expected that FDI can come into these manufacturing sector. Though it is difficult to estimate the exact quantum, if the schemes are properly designed after taking feedback from the industry, then FDI can see a big jump over the next few years.

Q: The bank index corrected 4.5 percent in 2020, though it rallied 81 percent from its March lows. Will the sector be a leader in 2021 after underperforming in 2020 and why?

The banking sector is a barometer of the economy. Whenever there are concerns on economic growth, then the banking sector corrects as its topline is impacted by slower credit growth and the bottomline is impacted by higher credit cost. After the initial concerns in March, the economy stabilised, which reduced the concerns on asset quality. However, currently, a large part of the growth is driven by stronger exports and weak imports, which implies strong external demand and teh relatively weak domestic economy. For the banking sector to lead the market, credit growth should come back, which is currently weak. In 2021, the Indian economy is expected to show a high single-digit growth, which augurs well for the banking sector.

Q: What are the key risks for 2021, especially after the emergence of a new strain of the coronavirus in the UK? Do you think coronavirus is still a major concern going into 2021?

When the coronavirus was first detected in early 2020, the governments globally were not sure how to control the pandemic and hence announced nation-wide lockdowns. This impacted the economy significantly. However, with the passage of time, it became evident that lockdown was not the solution. Also, a number of vaccines have been developed which will help in containing the infection. Hence, coronavirus doesn't seem to be a major concern going into 2021.

The key risk globally remains the change of regime in the US, with e Biden taking the oath in January 2021. This will lead to a change in the economic and geopolitical priorities of the USA, which can impact the global economy. The second risk is the withdrawal of stimulus announced by the government and central banks as the threat of virus withdraws and the economy stabilises. Domestically, the trajectory of inflation will be important, as it will determine the future course of monetary policy.

Q: What is your reading of 2020 and what should the government do more in 2021 to bring the economy back on track?

India has always been good at managing crisis and 2020 has again reemphasised that strength. With limited resources, India has been able to control the damage to both lives and livelihood. The government has also used this to push through important reforms in labour and farm sectors and announced measures to boost manufacturing in India. Growth is expected to rebound strongly in 2021 due to the base effect but the bigger challenge is in sustaining this momentum and getting the economy to grow at more than 6 percent beyond 2021. For this, the government should focus on job creation by incentivising the manufacturing sector as it will help in creating sustainable growth.

Q: What is your view of the global economy for 2021, with COVID-19 still a  risk for Europe and the United States? Do you expect more stimulus measures from these countries?

The global economy is expected to grow at around 5 percent in 2021 after degrowth of 3 percent in 2020. This is mainly on the back of normalisation of economic activity. Emerging markets led by India and China are expected to grow faster than the developed markets. Inflation is likely to head higher as the fiscal stimulus has created demand, while the supply-side remains disrupted. The US dollar is expected to remain weak due to a high fiscal deficit and debt to GDP ratio in the US.

The governments in the western world have committed to continue with the stimulus till the employment scenario stabilises. As a case in point, despite US GDP being at 97 percent of pre-COVID-19 levels in Q320, the underlying adjusted unemployment rate is still at 10.2 percent versus a pre-COVID-19 run rate of 3.5 percent. The current expectation is of stimulus to continue in 2021, albeit at a slower pace. G4 central bank balance sheets are likely to expand by $3 trillion in 2021 against $8.6 trillion in 2020. The fiscal deficit will moderate from mid-teens in 2020 to high single-digit in 2021.

Q: What kind of opportunities or threats India faces with regard to the coronavirus?

The base scenario, as of now, is that COVID tension is easing. In that case, India will have to make sure that it works on improving its long-term growth potential by focussing on investment. The world is looking to develop an alternative source of supply to China. By focussing on ease of doing business, India can emerge as a credible alternative. The government has taken a lot of measures like fiscal incentives, changing the labour laws and reducing regulatory approval requirements in the last few years to improve India's competiveness in manufacturing exports. However, the government will have to keep on working on it. In an unfortunate scenario of COVID tension persisting, the focus will remain on protecting lives and livelihood.

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Sunil Shankar Matkar
first published: Dec 30, 2020 10:04 am
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