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HomeNewsBusinessPersonal FinanceMarket valuations are factoring in very strong earnings growth for the next fiscal: Axis MF

Market valuations are factoring in very strong earnings growth for the next fiscal: Axis MF

The capex cycle should pick up, initially led by public infrastructure spending, followed by private sector capex

January 05, 2021 / 11:32 IST

As markets continue to rally relentlessly, Moneycontrol’s Jash Kriplani spoke to Jinesh Gopani, Head-Equity at Axis Mutual Fund, to get his perspective on what’s taking the indices higher. As a someone who manages Rs 80,000 crore in assets, Jinesh also shares his views on the economic recovery in 2021, whether stocks markets can hold onto current levels, potential risks, and the sectors he is positive about. Excerpts:

Equity markets have rallied sharply from March 2020. Are these market levels sustainable?

There has been a sharp re-rating in a short span of time, so caution is warranted. This rally has been fueled by the easing of COVID-19 fears, with cases reducing, economic activity sharply bouncing back to pre-COVID levels, positive news flow on administering vaccines and strong Q2 earnings led by cost management. Global quantitative easing and a weak dollar resulted in massive fund inflows into India from foreign portfolio investors. The market’s valuations appear elevated at 20 times the estimated earnings for FY22. These valuations are factoring in very strong earnings growth for financial year 2021-22. Continued flow of liquidity can keep the market levels elevated. But liquidity is a tough variable to gauge. It is important to keenly watch the fundamentals and look for improvements on that front. Global liquidity remains a key risk to current valuations.

What is your take on the expected economic recovery in 2021?

We expect 2021 to look quite different on the growth front. With economic indicators improving, we continue to assume that the pre-COVID levels of economic output will be achieved by the end of 2021. The recovery should gain strength from the second quarter of financial year 2021-22. We expect an accommodative monetary policy stance from the RBI to support the recovery and an initiation of structural reforms to lift the medium-term growth prospects. The capex (capital expenditure) cycle should pick up, initially led by public infrastructure spending, followed by private sector capex.

Inflation has been on the higher side recently. Do you see inflationary pressures continuing?

Inflation has been on the higher side in the last few months and is above the upper-band of RBI’s threshold of 6 percent. We expect inflation to decelerate from the current high levels. However, it is likely to remain near the 4.5 percent mark for a good part of 2021, with core inflation staying firm as growth recovers.

What is your expectation from Budget 2021?

We would be looking for a roadmap from the government on what it would be doing to continue this momentum in the economy and take it to the next level.

Which sectors are you positive about?

If we are looking at a 10 percent GDP growth next financial year on a lower base, sectors such as financial services, auto and auto ancillaries – which are led by domestic factors – as well as consumption to some extent, should participate in this rally. Financial services are the backbone of the economy. If the economy returns to a higher growth trajectory, earnings can come back pretty fast for the financial sector. But the caveat here is that there should not be any new black swan event such as a serious threat of the pandemic coming back.

What were some of your learnings from 2020?

On the positive side, we were already a bit cautious and were sitting on reasonable cash to deploy slowly and reasonably, as we had received strong flows in the last two years. Fortunately, we got the opportunity to invest in the stocks that we owned, again. Another good thing was we didn’t have to sell any stock because of COVID-related issues. Our philosophy of investing in well-governed companies, with strong balance-sheet, good return on equity and cash flows, has paid off quite well. We held on to these stories, and most of these have bounced back as per our expectations.

On the flip side, we may have missed out on some of the stories in the initial cycle. The learning was that you should not ignore any sector that would allow you to diversify the portfolio a bit more.

Jash Kriplani
first published: Jan 5, 2021 11:32 am

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