Growth expectations may remain low but the drop in the cost of capital can drive up equity markets; recent monetary and fiscal efforts by central banks and governments have led to a bounce in equity markets, Kartik Soral, Senior Fund Manager Equity, Yes AMC, tells Moneycontrol's Sunil Shankar Matkar in an interview.
Edited excerpts:
Q: After a 26 percent correction in FY20, do you think the market will recover the losses in FY21? What is your broad call on the market?
As 2020 has demonstrated, we can never be sure about the future and at best, talk about it in a probabilistic manner. As we stand today, we see that there is a high probability that the COVID-19 episode will be a long-drawn process, with the hope of a cure or vaccine only after 9-12 months. If this happens, the world will have to accept this new reality and start getting back to work slowly with precautions and also have room for repetitive lockdowns. As this problem has its origin outside financial markets, the solution will also have to be found outside financial markets for the world to get back in the growth mode. We will not hazard a guess at this stage when that would happen.
However, apart from growth expectations, we believe the equity prices are also inversely impacted by the cost of capital, which, in turn, is driven by interest rates, inflation expectations and liquidity stimulus. Therefore, even though growth expectations may remain low, the drop in cost of capital can drive up the equity markets. This has also been in the works over the last two-three weeks when central banks and governments globally stepped up their monetary and fiscal efforts, leading to a bounce in equity markets. In our opinion, in times of very high stimulus and low interest rates, equity markets may continue to behave in a buoyant fashion even though economic reality may be very different.
To us, it appears that growth expectations are already at all-time low and the cost of capital is also on its way down. Probability of a broad-based market fall due to the existing problem seems low.
Q: Is it the right time to buy stocks in bulk or should it be a staggered purchase? What is your advice, given the attractive valuations across sectors? What should be investors do with their portfolios in the current environment?
In equity markets, it is seldom a good idea to deploy capital at one go. We almost always suggest a staggered investment. Also, we don't think that investors should own only equities. Owning other asset classes like debt and gold that have proven to provide stability to the portfolio when equity is volatile. In our opinion, it is more true today when equity markets try to find stability on weaker of the two legs (low cost of capital), while the other leg (growth) recovers.
Q: Most experts are not too bothered about the March quarter earnings, as the impact of lockdown will not be visible. Do you agree? Do you expect the first half of FY21, and the second half, to some extent, to be bad for earnings? Will FY22 be better?
Yes, for all companies taken together, it seems logical. However, individually, many companies will behave differently.
Q: IMF's Kristalina Georgieva says the coronavirus crisis is worst since the Great Depression. Does it mean that the global economy will be in a recession for a longer period? Is India in a better position than the United States, Europe, China, etc?
The world has changed a great deal since the Great Depression. Even the World Bank and IMF did not exist then. So, we do not know. However, what is known is that it is a global crisis like we haven't seen before and that, so far, central banks and governments have responded very well. We think things are evolving very rapidly and with everyone trying to solve the problem, we should be able to get over it.
India has a low US-denominated debt, good FX reserves, falling crude oil prices, younger population, huge domestic market, well-functioning government bodies and a strong democracy. I would say we are in a reasonably good place and I am sure we will come out stronger.
Q: IT companies have, so far, reported disappointing numbers for the March quarter. What are your thoughts on the sector and its earnings momentum?
Indian IT companies have been survivors–they have adapted to all previous challenges quite well. Over time, they have made their client relationships stronger, workforces nimble and also kept their balance sheets light. Yes, earnings are bound to suffer in times like these. However, as investors, we are confident that these companies will adapt to new realities faster than we expect.
Q: Most experts expect the government to come out with a stimulus package soon. What are your expectations on the package and do you think it could be more than 5 percent of GDP?
Well, India has been in a full lockdown for four weeks now, with another week and a half to go. That is roughly 10.5 percent of the full year when India has and would not have been operating at its full capacity. This is the cost of the lockdown. Someone has the bear this cost. Without a stimulus package, we may see big deflationary impact on the economy coming from large-scale business losses, low capex cycle, escalating bad loans, wide-spread job losses, higher poverty and a fall in savings rate and investments. Also, given the special circumstances when every major economy is providing a fiscal stimulus supported by debt, we should not shy away from such a response. Therefore, we do expect a stimulus package from the government sooner than later. We believe it could be around 5 percent.
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