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We do not expect the markets to correct more than 5% from here: Unmesh Kulkarni of Julius Baer India

The medium-to-long-term prospects of economic recovery and earnings growth remain intact, subject to the country getting a handle on the COVID wave in a reasonable time, said Kulkarni.

May 04, 2021 / 10:38 AM IST
Unmesh Kulkarni, Managing Director-Senior Advisor, Julius Baer India.

Unmesh Kulkarni, Managing Director-Senior Advisor, Julius Baer India.


Unmesh Kulkarni, Managing Director Senior Advisor, Julius Baer India expects the upside for the Indian equity markets to be capped in the near term until the COVID situation comes under control, he does not expect the markets to correct more than 5% from here.

Kulkarni has about 20 years of experience in the wealth management industry. Prior to his current role, he worked with Merrill Lynch Wealth Management in India for over 14 years, where he was heading the product and strategy functions.

In an interview with Moneycontrol's Kshitij Anand, Kulkarni said that if the partial lockdowns are replaced by more stringent ones or perhaps a more “national” type of lockdown (which looks less likely as of now), we could see GDP downgrades by anywhere between 0.5% - 1.5% (of annual GDP). Edited excerpts:-

Q) Partial lockdown in various parts of the country, vaccine shortage, as well as increasing number of deaths, is likely to impact economic activity as well as corporate earnings. What is the kind of impact you see on markets?

A) The strong positive sentiment created by the growth-oriented Union Budget, just a couple of months back, has been currently over-shadowed by (a) the near-term uncertainty created by the rapid rise in coronavirus infections in the country, (b) the struggle of the state machinery in containing the spreading infections and consequently the punitive measures taken by the state administrations in the form of curfews/lockdowns, and (c) the disruption in the vaccination drive.

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If the lockdowns/restrictions intensify in the coming days, there will be some impact on the economic recovery, and consequently, the earnings momentum that has been building so well since the last couple of quarters.

The exact impact will be determined by the extent of the restrictions as well as their duration. If the partial lockdowns are replaced by more stringent ones or perhaps a more “national” type of lockdown (which looks less likely as of now), we could see GDP downgrades by anywhere between 0.5% - 1.5% (of annual GDP).

Earnings estimates for Q1 and Q2 of the current fiscal are also likely to be revisited by analysts, especially as expectations have been built already around a strong earnings rebound.

In the near term, the market sentiment will be driven by COVID-related news flow. Markets have already corrected 6-7% from the February peak due to the current uncertainty, at a time when the global markets have continued to do well.

While the upside for the Indian equity markets may be capped in the near term until the COVID situation comes under control, we do not expect the markets to correct more than 5% from here.

The strong undercurrent from the global rally has been supporting the Indian markets, and unless the global markets were to correct meaningfully, Indian markets should be resilient at lower levels.

The medium-to-long-term prospects of economic recovery and earnings growth remain intact, subject to the country getting a handle on the COVID wave in a reasonable time, and markets will be quick to bounce back once some clarity emerges that the worst is behind.

Given the near-term uncertainties, investors should ensure that they stay within their core asset allocation. If the allocation has become skewed towards equities due to the significant run-up over the last year, it may make sense to do some prudent rebalancing in the portfolio.

Secondly, investors must extend the time horizon of their equity investments; it may be difficult for investors to profit meaningfully in the current year until the situation stabilizes a bit.

Q) The government has opened vaccines for all above 18 years. Do you have this sentiment on D-Street? Or stock-specific action will continue?

A) From a market sentiment point of view, this may be a short-term positive, as it widens the population base being vaccinated. However, there may be supply challenges, as India’s vaccination programme is currently running on only two vaccines, both of which have been facing production constraints.

A ramp-up of the vaccination drive is critical for the COVID wave to flatten and taper off, which would be a real sentiment booster for the equity markets.

At the broad index level, we are likely to trade range-bound in the near term, given the uncertainties. However, there will be opportunities, both within stocks as well as from those emanating from sector rotation, as markets assess the impact on sectors and businesses.

Q) Small & midcaps have outperformed in the recent fall, but if the economy takes a hit, the excess in the broader market space might also go out. What is your view on the small & mid-caps space?

A) Overall, for the year, we remain positive on mid and small-caps on the assumption that the COVID situation will peak out soon and normalise in a couple of months’ time, with limited damage to the economy.

In the near-term, if the lockdowns persist for an extended period and the broader market corrects, the mid/small caps could also face selling pressure, especially as they have seen a very good run-up over the last 9-10 months, and their valuations are now at a premium to large caps.

However, over a slightly longer period (3-5 years), mid/small caps are still under-performing largecaps, and there is certainly some catch-up to do.

Moreover, there are opportunities emerging in select companies and sectors due to the thrust on domestic manufacturing and disruptions being faced by the unorganized players, which can help some quality mid/small-cap companies to emerge stronger.

Any correction, therefore, can be viewed as an opportunity by investors to accumulate mid/small-caps, which certainly have the potential to outperform largecaps and the Nifty index over the next 12-24 months.

Q) Pharma space is buzzing and most stocks have already outperformed even though the benchmark indices are trading flat to lower. How should one pick stocks in the pharma space?

A) The pharma sector was underperforming the broad market up to February-end, especially as the rotation trade kicked in, from growth/quality to value and cyclicals.

Over the past few weeks, the pharma sector played catch-up with the broader market and relatively outperformed - more so in the context of the resurgence in COVID cases and investors eyeing opportunities in healthcare, besides an overall tactical shift to defensives.

Our approach within the pharma sector would be to look beyond the current COVID wave, i.e., not just the companies benefiting from COVID, but rather the structural opportunities.

We prefer companies that have built a strong pipeline of products, or companies that have been in an investment drive over the past few years - for instance, in segments such as biosimilar, transdermal, injectable, inhalers and niche specialty products, as these will soon start bearing fruits in the form of better growth visibility and improved profitability/return ratios.

Overall, we remain positive on the pharma space, but would avoid buying aggressively at the current levels, and rather prefer cherry-picking at reasonable levels.

Q) Is the smart money moving towards Corona proof sectors? MFs increased allocation towards IT, healthcare, chemicals, and cement on an MoM basis in March while banks, oil & gas, utilities, and capital goods saw a decrease in allocation.  

A) In light of the deteriorating COVID situation in the country, it is natural for market sentiment to shift to the safer bets – the corona-proof sectors, perhaps temporarily.

In fact, to some extent, this has already happened. On the other hand, over the last week or so, the smart money has actually started nibbling at the corona-prone sectors, expecting the COVID situation to peak out and the normalization to start soon.


In the very near term, the COVID news flow and daily numbers will likely prevail upon the market sentiment. In the short term, therefore, one can be more cautious and take refuge in some of the defensives and corona-proof stocks.

However, the COVID situation could be very fluid, and if there is any sustained improvement in the ground situation, one can start increasing allocation to cyclicals, including banking and financials.

Q) FIIs turned net sellers so far in April after 6 months. Do you think with rupee weakening, rise in COVID cases, lockdown – the pressure on D-Street may well continue?

A) We think the FII selling is a temporary phenomenon, driven both by sentiment around the deteriorating COVID situation in the country as well as the Rupee weakening post the RBI monetary policy.

Our overall view is that the US Dollar is unlikely to appreciate this year - rather it may remain weak - which should benefit flows into the Emerging Markets, including India.

In the near term, the “negative” news flow around the prevailing COVID situation and lockdowns could keep the FII flows a bit jittery, which may keep the markets in check.However, overall, the economic recovery theme is still intact for the full year, and FIIs should therefore resume their buying of Indian equities as soon as there is some semblance of the situation starting to normalize.

Q) Robinhood investing picked up in 2020 – do you think this is just a short-term phenomenon and the “DIY” approach will not last long as new investors may well fail to generate alpha as markets turn choppy?

A) Last year, in the US, given the lockdowns and pursuant economic contraction, people had a lot of time at their disposal, and there were many with no fresh income-earning opportunities.

Hence, with free money being doled out by the US Government during the pandemic last year, many US citizens took to “investing” as an activity.

Besides, over the last 9-12 months period, there have been no meaningful corrections in the US markets, and these “Robinhood” investors have only witnessed gains in the equity markets, and thus become more confident, which has kept their investment momentum going.

What could change their behavior? Well, if a “meaningful” correction in US markets comes about, and the Robinhood investors start seeing some erosion in their portfolios, their over-zealousness should abate.

Besides, with more and more normalization of activity happening over the next few months in the US and people returning to their workplaces, they would have less time to spend on their screens, and consequently, allocations to capital market from the Robinhood investors should reduce.

Q) View on metals, commodity-linked stocks in 2021?

A) Metals and the commodity sector have benefited from (a) expectation of normalization of activity and healing of economies, globally, especially with the vaccination drive picking up, and (b) the China factor – the environmental issues leading to supply cuts, which were supportive for commodity prices.

Metal and commodity stocks have done very well in recent months. However, one needs to be vigilant and keep monitoring the underlying commodity price movement, which can swing quite fast based on incremental news flow /expectations (especially from China).

We view the metals sector as a tactical play. The current rise in the underlying metal prices is definitely resulting in significant improvement in profitability and cash flows of the metal companies, helping them to deleverage and thereby improve their market capitalization.

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.

Kshitij Anand is the Editor Markets at Moneycontrol.

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