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Lately, we have seen that frontline equity indices are witnessing pressure at a higher level. So, will markets continue their correction? Also, share your views on how equity markets are likely to perform in CY21?
Indian markets at Nifty 50 forward PER of 20x is around its fair value. Even though this is higher than the long-term averages, some premium to historical ranges is justified by the lower risk-free rates at both global & domestic levels. However, when the markets reach fair value on forward PER basis, two things will happen: (i) markets will react more to short-term news flow, case in point being the recent rally as the second wave seems to be past its peak and (ii) the future equity returns will be driven by the medium-term earnings outlook i.e. FY23 & beyond and not just the recovery in FY22. Till we get more visibility on the medium-term earnings growth sustenance, short-term volatility might continue. We remain optimistic of low teens returns from equity over the medium term with greater visibility on the same after a quarter.
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What impact does the second wave of Coronavirus will have on the equity market?
The second wave is not likely to have a severe impact on corporate profit growth, unlike the first wave. Even in the first wave, the profit forecasts for FY21 rebounded quite well after the initial cut due to (i) strong performance from IT/pharma (ii) cost savings by the corporates, and (iii) lower-than-expected COVID stress on the bank’s loan books. In the second wave, there is so much supply shock, unlike the first wave but consumers/corporates managed to adjust their functioning. Having said that, discretionary spending has also been impacted on the demand side in the first quarter, which can lead to some profit cuts. However, it is unlikely to be very severe. It is important to remember that corporate profits grew at an aggregate level in FY21 despite a GDP decline of 7-8 per cent. So, if the GDP growth in FY22 slows down from 11-12 per cent to say, 9-10 per cent, the impact on corporate earnings is unlikely to be very dramatic.
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The technology and pharma sectors were the ones that created stupendous wealth for investors in FY 2020-21. For FY 2021-22, which sectors do you feel are likely to outshine other sectors?
The commodity boom coupled with the countercyclical fiscal policy (although it will be tested due to slower growth in FY22) can lead to broad-based investment cycle recovery. We are seeing early signs of private sector Capex revival in sectors like steel, cement as well as PLI-driven sectors. In addition, there is a Capex shift towards renewables and automation, which could benefit select companies. All in all, we are more optimistic about the capital goods sector today than a year ago. While technology and pharma sectors have to go rerated, some growth momentum can still be seen that will sustain interest in those sectors. The banking sector, especially large private sector banks, have come out of COVID with a stronger market position & much lower stress, and hence, they may turn out to be big beneficiaries of recovery.
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Metal sector has been heated up quite a bit. So, what are your thoughts regarding the metal sector?
Metal sectors have got benefited from supply crunch and demand recovery globally. However, we are beginning to see some soft intervention in China especially in steel/iron ore while the present valuation leaves little margin of safety at the present levels. Non-ferrous metals appear relatively better placed in terms of risk-reward.
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According to you, what asset allocation should investors look for at the current market levels?
At the present valuations, we advise investors to invest in a combination of balanced advantage fund, Flexi-cap/large & mid-cap fund along with small allocations in sectoral as well as small-cap funds.
PS: The views expressed in this article are personal in nature and are in no way trying to predict the markets or time them. The views expressed are for information purposes only and do not construe to be any investment, legal, or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such actions taken by you. Please consult your mutual fund distributor before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund.
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