Shailendra Kumar, Chief Investment Officer, Narnolia Financial Advisors says 2020 has been a “turnaround” year that saw the end of the structural decline in the Indian economy as measured by industrial growth, investment capex, bank credits, etc.
Kumar is upbeat on the new year as well. In an interview of Moneycontrol’s Sunil Shankar Matkar, Kumar says he is confident of improved corporate earnings and is sure that the foreign investment in India will continue to flow and easily surpass $50 billion. Edited excerpts:
Q: The year 2020 showed extreme pessimism as well as extreme optimism. What is your reading of the year and do you expect double-digit returns in 2021 as well?
At present, the year 2020 is being remembered for extreme pessimism post the pandemic trigged large fall in various asset classes, including equities and the sharp rally thereafter. But, I think going forward, 2020 would be remembered by investors more as the year that ended the bear market that had started in 2017. In a broad economic sense, the year 2020 would be remembered as the year that saw the end of the last 8-10 years of structural decline in the Indian economy as measured by industrial growth, investment capex, bank credits, etc. 2021 will be the year when economic revival becomes structural. First three quarters of the calendar 2021 will also have positive spikes in growth numbers due to the low base of the first three quarters of 2020.
Q: What is the biggest lesson you learnt from 2020 and what will you not do in the coming year? What is your advice to investors for 2021?
A year like 2020 where within a year market showed such large variation is always a great learning experience. It helped us identify and validate the finer nuances of our investment philosophy. The lesson was to not get carried away by short-term forces and always have the big picture clarity of macro trends, industry trends, and most importantly, the execution capability of the management of portfolio companies. We all have learned that there is a company behind every stock and ultimately what matters to the stock price is how the company that is behind that stock is doing. But, I think we should add further and say—behind every company, there is the management and that matters the most.
Barring situations where the macro opportunity is really very large, in all other portfolio companies, one needs to be very watchful of the management strategy and the execution. Starting 2021, we are entering into a period of improving economy and rising market, prices of all kind of companies will rise but we should be avoiding companies where one is not certain of management strategy and execution.
Q: Which are the key sectors one must add and avoid in the 2021 portfolio?
Improvements in IT companies led by digital transformation will continue throughout 2021. Companies benefitting from higher infra spending will also exhibit growth on account of better macro conditions and improved government finances. By the end of March, we will have more clarity on companies in sectors like auto, auto component, chemicals and food processing benefitting from proposed Production Linked Incentives (PLI).
PLI is already helping electronics contract manufacturing space. Credit space should also see a strong comeback post current uncertainties on the NPA status. Another interesting space is the whole ecosystem surrounding 5th generation mobile network. Just the way 4G brought massive opportunity in consumer tech, 5G is expected to bring in large efficiency gains to the manufacturing sector. Traditional energy space looks in for a structural decline with most of the growth coming from renewable space and should be avoided.
Q: Prime Minister Narendra Modi has said India received 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 has crossed a major milestone of receiving a cumulative $500 billion in FDI. Even in a pandemic-hit year, with more than $35 billion during the first five months of the fiscal-2021 suggests that we will easily surpass the figures of $50 billion that we received last fiscal. Surely, we should be able to attract much higher inflows going forward due to various factors – China plus one strategy, improved liquidity globally, higher FDI in defence sector, various other sectors getting PLI. World's leading names in mobile Samsung and Apple (through its contract manufacturer- Foxconn, Wistron and Pegatron) have already started their manufacturing base in India.
Also our per capita income will cross $3,000 mark by FY24, triggering the next round of consumer boom. A mini-consumption boom took place in India post-2013, when our per capita income crossed critical $1,500 level. So, while PLI will help India improve its manufacturing competitiveness in the global market, a rising per capita income in a large country like India will ensure consistent foreign inflows.
Q: Should one prepare for selling pressure in the market in 2021 after record highs in 2020? Should investors book profits or wait for another rally?
The Nifty was trading in a sideways range of 10,000-12,000 over 2017-2020 with occasional spikes outside this range. But now with the rally in the last six months, the Nifty is firmly outside that trading range, implying a new expansion phase.
Equity markets return is never linear. The long-period annual return of the Nifty has been 15 percent. But the returns have never happened in a gradual yearly 15 percent manner. The Nifty, in the past, had few years of 0 percent returns and 30 percent annualized return in the subsequent years. So, one should not look at the current rally from the prism of what happened during 2018 or 2019 rather it should be viewed as to start of a new cycle. At the same time, the current rally should also be used to exit from investments that one might have made in the past purely on some valuation multiple basis while unsure of business and management quality. At the same time, one should maintain the strategy of buying good quality businesses whenever the next market correction happens. And in this new expanding market also there will be a period of some months and quarters where it will give back some of the gains.
Q: What are key triggers that can keep supporting the market in 2021?
Strong GDP growth for the Indian economy going forward will support equity market returns. We expect structural GDP growth of 7 percent plus going forward, based on growth drivers like improved manufacturing on the back of lesser imports from China, indigenous defence productions, electronics contract manufacturing, higher infrastructure spending, PLI providing impetus to manufacturing sectors and higher contribution from larger digital adoption world-wide.
Also, unlike in the recent past, corporate earnings will grow at a higher rate than the nominal GDP growth. Corporate profit as a percentage of GDP has fallen from the highs of 7.8 percent in FY07-08 to current 2.8. Indian corporates passed through a long cycle of balance sheet clean-up, inventory de-stocking and margins decline but post the pandemic shock, India Inc looks set to reverse this cycle, resulting in higher earnings growth.
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