Last Updated : Nov 18, 2020 12:58 PM IST | Source:

'Market to continue up move in 2021 amid improving macro, low interest rates, weak US dollar'

The progressive unlocking of the economy every month has translated into a number of high frequency economic indicators reverting close to their pre-pandemic levels, some even exceeding those.

Sunil Shankar Matkar

Unmesh Kulkarni, Managing Director & Senior Advisor at Julius Baer India, feels the next decisive move in the markets could come with the economy and earnings picking up in a consistent manner over the next couple of quarters.

At the aggregate Nifty level, a higher single-digit or lower double-digit performance seems to be the likely scenario in the new Samvat, according to him.

He believes healthcare is a structural long-term opportunity, while financials (private sector banks and NBFCs), which saw the brunt of the selling at the start of the lockdowns on concerns over asset quality, are likely to stage a comeback with the economy picking up and the realisation that the credit situation is not as bad as was feared at the start of the pandemic.


Edited excerpts:

Q: The market gained around 10 percent in Samvat 2076. Can the market give double-digit return in Samvat 2077. If yes, what would be the key driving factors?

Samvat 2076 was a challenging year and in some way, unforgettable too. It will probably go down in history as a year that completely shook the world and changed its dynamics - the coronavirus pandemic setting in, human activity getting paralysed with the lockdowns for almost half of the year, global and Indian growth nosediving to unheard-of lows, a severe liquidity crisis erupting in the Indian debt markets in the middle of the year, natural calamities striking across the world, Indo-China relations hitting a fresh low, and to talk about the latest, a rather stormy and uncharacteristic US Presidential election that held the breath of practically the entire world. Despite the multitude of such events, the global stock markets, as well as the Indian markets, braved the challenges and staged one of the smartest recoveries in recent times, ending the Samvat 2076 year in the green; the Nifty 50 clocked gains of 10 percent, while the Nifty Midcap 50 gained 13 percent.

So what brought cheer to the markets amidst all the clouds of despair and pain? It is said that when unprecedented things happen around us, policy makers around the world pull up their socks and take unprecedented action to combat the stress. Since the outbreak of the pandemic, several governments and global central banks across the world have pumped in huge doses of liquidity, whether through fiscal stimulus or through monetary easing. Even in India, the RBI proactively cut policy rates and unleashed a series of liquidity measures to ensure the much-needed stability in the financial markets, while also maintaining a low rate environment to support growth. The Indian government, on the other hand, announced three series of 'Atmanirbhar' stimulus to address the post-lockdown pangs faced by some industries and certain sections of the population.

The progressive unlocking of the economy every month has translated into a number of high frequency economic indicators reverting close to their pre-pandemic levels, some even exceeding those. The RBI, in its latest policy review, also expressed confidence that the economy will bounce back from here and growth will pick up sequentially over the next 2-4 quarters.

The coronavirus situation in India has seen a marked improvement over the last month or so, and this augurs well for the further opening up of the economy. Further, the recent announcement from Pfizer about the effectiveness of their vaccine (although not relevant for India) has brought cheer to the markets that the much-needed vaccine is around the corner.

Given the large fiscal stimulus doled out by the US government and with expectations of more to come, the US Dollar has been weak since the last few months, which has benefited emerging markets (including India) in terms of flows from foreign investors.

Given the improving macro backdrop as well as the environment of low prevailing interest rates and a weak US Dollar, we expect Indian equity markets to continue to do well in 2021. However, given the steep rally seen in the last few months and the stretched valuations in some sectors, the near term outlook on the market would be 'neutral'. The next decisive move in the markets could come with the economy and earnings picking up in a consistent manner over the next couple of quarters. At the aggregate Nifty level, a higher single digit or lower double digit performance seems to be the likely scenario in the new Samvat.

Q: Will the winners of Samvat 2076 - IT and Pharma - continue to be in limelight in Samvat 2077 too? Will others including banks, infra, realty, metals, auto and FMCG outperform IT and Pharma in Samvat 2077, and why?

The market rally in a major part of Samvat 2076 was a bit lopsided, with the buying interest concentrated in a few sectors as well as a few headline stocks. IT and Pharma have been the biggest beneficiaries in the pandemic environment, and these sectors therefore stood out as top performers.

With the progressive unlocking of the economy, the market participation is getting more broad-based, and there could a case for some sector re-allocation.

Healthcare is a structural long-term opportunity and we are positive on the sector, although in the near-term it may see some profit-taking due to the run-up already taken place this year. On IT, we have turned neutral for the near-term, as the sector has run up quite a bit owing to the positive sentiment in the current 'Work from Home' environment; however, we expect a new wave of outsourcing to emerge for the sector, which should benefit the companies over the medium term.

Financials (Private sector Banks and NBFCs), which saw the brunt of the selling at the start of the lockdowns on concerns over asset quality, are likely to stage a comeback with the economy picking up and the realisation that the credit situation is not as bad as was feared at the start of the pandemic.

Consumer Discretionary should also start recovering, partly from the pent-up demand and the festive season, and more with the resumption in the economic activity. We also like Utilities (due to attractive valuations) and Telecom (on expectations of a healthy growth in ARPUs and earnings), while we would be cautious on Metals after the recent sharp run-up seen in the stocks.

We would also keep cyclicals (such as Industrials/Infra) on our radar and watch for any sustained improvement in the capex/investment cycle, as the space has been a big underperformer in the past few years.

Midcaps and smallcaps, after a gap of a couple of years, staged a comeback and started outperforming towards the second-half of Samvat 2076, and we expect this trend to continue in the new Samvat, as the markets start becoming more broad-based.

Q: Economic data points indicated that the economy is on the recovery path. What is your reading on the same and what do you expect the economic growth by end of Samvat 2077?

Yes, several high frequency indicators have shown a remarkable improvement over the past 2-3 months, especially with the unlocking of the economy. Many indicators have reached pre-COVID levels or even surpassed them already.

E-way bill generation, auto registration (tractor, cars and two-wheelers) and GST collections have all picked up considerably, indicating a definite buoyancy in economic activity. Manufacturing PMI is at a multi-year high, daily average freight (trains) is back to pre-COVID levels and power consumption is on an uptrend, indicating that industrial activity is gathering momentum.

The RBI is expecting GDP growth to start recovering from Q2FY21, turn positive in Q4 and accelerate to 20.6 percent in Q1FY22 (YoY on a low base of Q1FY21). We would largely go with that, and expect the full-year FY21 GDP to end somewhere in the negative 8-10 percent range, while the growth in FY22 should be in higher single digits, on account of an across-the-board recovery.

Q: FII inflow has been strong in last few months after easing COVID-19 crisis. Do you expect the FII flow to continue in Samvat 2077 and why?

Yes, very much. Barring a couple of months (and especially March), FPIs have generally been active in Indian equity markets through Samvat 2076. We expect similar or higher levels of optimism among FPIs for Indian equities in the new Samvat.

Firstly, a subdued US Dollar on account of the heavy fiscal push by the US government augurs well for Emerging Markets, including India. Secondly, India is seen coming out of the COVID crisis sooner and stronger compared to some of the other western countries that have been hit by a second or third COVID wave. And finally, the strong demographics, good monsoon, adequate Government and RBI measures to revive growth and strong forex reserves make India stand out as a potential favoured growth candidate in a post-COVID world.

Q: With the winning of Democratic Party’s Joe Biden, do you think risks like global trade war and some geopolitical tensions will ease in Samvat 2077?

It seems likely that the new government, under the leadership of the current President-elect Joe Biden, will be keen to maintain a balance in its global relations. While it is still early days, one can expect some softening of the trade tensions, or at least, the new Democratic government will probably try not to strain the trade relations any further.

If one looks back into the US election history of the last four to five decades, most Democratic government periods have yielded positive returns for the S&P 500, even in the very first year of rule. The average annualised return of the S&P 500 during Democratic rule (full term) has been much higher than during Republican rule. If history were to be relied upon, one can expect an overall benign period for the US stock markets, which should create a good backdrop for the Indian equity markets as well.

Q: Do you really feel the FY22 earnings would be robust on the back of better-than-expected September quarter earnings, and why?

Corporate earnings in the September quarter have beaten expectations, and are seen setting the stage for a sequential recovery in earnings. Most importantly, the management commentaries suggest confidence among Indian corporates with respect to revival in demand.

We have started seeing earnings upgrades across sectors, after several quarters of consistent downgrades. The supply situation that was disrupted during the lockdown period has almost reverted to normal. On the other hand, the recovery in demand, across sectors has also been sharp. This has led to better pricing power and improved realisation for the companies. Besides, a large number of companies have taken various cost-cutting initiatives during the lockdown period, some part of which could be structural in nature. IT companies have reported robust deal pipelines, which should translate into improved sales in the coming quarters. The BFSI space has also witnessed improvement in loan disbursements as well as efficiency in collection.

All these, coupled with a favourable base of FY21, should ensure a healthy earnings growth trajectory in FY22.

Q: What are key global risks and triggers for the economy and markets in Samvat 2077?

The two key global risks that are currently staring us in the face are (1) deterioration in the COVID-19 situation and (2) delay in the passage of the stimulus bill by the US Senate.

The western world is already witnessing a rather harsh second / third wave of COVID, which has resulted in a reinstatement of partial lockdowns in some of the countries.

Since mid-September, India has seen a remarkable drop in fresh COVID cases as well as the number of active cases. And this has given the Central Government as well as the State Governments the necessary leeway to announce additional unlocking measures. What the country needs at this time is a continuous improvement in the COVID situation, which will enable it to finally revive the most distressed parts of the economy – travel, tourism, hotels, entertainment – besides getting the overall economy back on track. Notably, the current festival season poses an internal risk that may potentially bring a temporary setback to the Covid progress that we have made recently.

A related risk is the (delay in) rollout of the COVID vaccine. The accelerated work on the development of the vaccine by several leading pharma companies across the globe, along with encouraging news-flow around Phase-3 clinical trials, has created expectations in stock markets that the remedy of the last resort, i.e., the vaccine, is around the corner, which will help economies come back to shape faster, with resumption in large-scale human activity.

Other risks that loom in the background are a disorderly Brexit and any further deterioration of trade relations with China (which looks a little unlikely at this time, with a Democratic government taking charge in the US). On the domestic front, the fiscal situation is a bit precarious and must be prevented from blowing over. And any escalation along the Indo-China border might just create a little dent in the momentum built around FPI flows.

On the other hand, a key positive global trigger for the Indian markets is an overall expected improvement in the global COVID situation in 2021, especially with the rollout of multiple vaccines in various parts of the world, which will lift consumer and business sentiment, and help in the revival of growth. Besides, the impending stimulus from the US Government will also act as a sentiment-booster for global markets in the near-term, although there may be changes to the shape and quantum of the stimulus from what was contemplated earlier. The newly elected Democratic Government is expected to bring some normalisation in global trade relations, which could provide just the necessary stability to the financial markets as they come out of a COVID-dominated 2020. And expectations of a subdued US Dollar could pave the way for a more optimistic outlook for Emerging Markets, including India, in 2021.

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First Published on Nov 18, 2020 12:58 pm