“Investors Are Waiting On The Sidelines”
R Venkataraman Chairman, IIFL Securities Limited
In this interview, R Venkataraman, Chairman, IIFL Securities Limited, presents an overview of both the economy and the markets and the way ahead
What is your overall assessment of the current market situation? When do you see normalcy coming back in India?
The Indian equity markets are trading at about 21x FY22 earnings on an optimistic growth assumption of about 38 per cent YoY. Although FY22 estimates have been steadily upgraded since the beginning of 2QFY21 reporting season, a combination of rising input costs and lockdown restrictions have raised the downside risks to FY22 growth assumptions. Having said that, we expect the second wave to peak by mid-May within 455000 per day and decline rapidly thereafter.
What is your year-end target for Sensex?
We expect 10 per cent upside for the broad market index.
Will the broader markets outperform Sensex in 2021 and beyond?
The mid and small-cap companies are more exposed to the domestic economy compared to large-caps. Hence the mid and small-caps could underperform the large-caps unless the second wave of the pandemic is quickly contained in India.
What are the biggest risks facing the equity markets?
A prolonged second wave which forces the state governments to impose lockdown restrictions could derail the economic recovery momentum that was underway until March. Inflation has been under pressure due to a broad-based rally in commodity prices. If inflation gets entrenched, it could force the MPC to tighten even before growth normalises.
Which pockets are expected to outperform in the coming quarters?
Since the developed economies like the US where about 44 per cent of population has received at least one dose and the UK where the vaccine penetration is about 51 per cent could normalise quickly aided by the rapid pace of vaccinations, export-driven sectors like IT, pharmaceuticals, chemicals, etc. could outperform the sectors exposed to domestic economy. The commodity prices are likely to remain at elevated levels due to confluence of factors including production cuts in China, healthy demand due to stockpiling and investment push and infrastructure spending plan proposed by Joe Biden. As a result, the metals and mining sector could also outperform.
What are you advising your clients? Are more and more investors allocating incremental money into equities or are they shying away?
Investors are waiting on the sidelines. If the situation in India improves, we could see a renewed surge of equity inflows. Equity remains the major asset class of preference for most investors. However, we always advise retail investors to have a goal-based diversified portfolio to manage volatility and risk. Wealth creation must be fruitful based on goals and not a high-risk chase. Even in equities one can diversify by investing into a basket of stocks based on solid research. All IIFL small case basket of stocks have given investors best returns with safety. Foreign flows into equity will depend on the global liquidity and central bank or government support. India remains the most attractive destination among emerging economies and once the second wave abates and the economy stays on track, we believe the flows could increase sharply.