The green shoots of recovery are yet to come forth, and we believe that the process of economic recovery itself may run its course till early 2021.
While we remain fairly bullish on the overall breadth of the markets, as a rising tide will lift all boats, there are a few segments that may perform incrementally better in relation to others. First and foremost, the consumption theme is likely to continue to perform well going ahead as well, Joseph Thomas, Head of Research at Emkay Wealth Management said in an interview to Moneycontrol’s Sunil Shankar Matkar.
Edited excerpts:
Q: What are your thoughts on markets post Budget. Will it maintain positive momentum considering the government measures and favourable global environment?
A) The two recent events, the Budget and the monetary policy have instilled more confidence in the market participants and investors. It has created an abiding faith in the earnestness of those in authority, that they would continue to take reasonable and sustainable measures to help the economy navigate through these difficult times and come out of the sluggishness in growth.
Both the Budget and the monetary policy contain pronouncements that may be termed as unconventional. The accommodation given to commercial banks in the CRR levels linked to the incremental lending to specific priority sectors, the intention to institute long term repos to provide stable liquidity conditions etc. are some of these unconventional measures, to name a few.
The abolition of DDT, thereby reducing the dual incidence of the same tax, freedom to the individual to determine the tax structure that he would like to go by, are similar measures in the Budget.
The very fact that the PSU disinvestments are going to be more than double of what has been done so far, is a positive indication that the systemic efficiencies are being enhanced by enhancing the efficiency of capital. The investment in gilts and corporate bonds is thrown open to overseas investors like never before, in addition to the tax holiday extended to sovereign wealth funds investing in infrastructure. All these are positive factors which will play an important role in shaping the direction of the economy in the longer term.
Q: What are the sectors that will create wealth in the next 3-5 years given the government’s intent to get the economy back on track?
A) While we remain fairly bullish on the overall breadth of the markets, as a rising tide will lift all boats, there are a few segments that may perform incrementally better in relation to others.
First and foremost, the consumption theme is likely to continue to perform well going ahead as well. The focus of the government on doubling farmer income will help in reviving rural consumption.
Keeping the government’s intent in mind, the second theme that may do well is the migration from the Unorganised-to-Organised, the footwear industry or the diagnostics is a good example. Thirdly, the government’s focus on affordable housing will be beneficial for developers in this space, and also for building material companies.
Q: What is your advice to investors as, gradually, lot of sectors/stocks may turn attractive on valuations front?
A) The assumption of valuations turning attractive, probably implies that the markets may trend lower over the near to medium term. While we do not expect markets to trend lower over the medium term, given the macroeconomic environment enhanced volatility cannot be ruled out. The best way to ride out the volatility and try to benefit from it is through staggering of investments. Similar to how a SIP works, HNIs can consider staggering their investments over a period of time.
Q: As we are in the last week of December earnings season, what are your thoughts on overall earnings and does that indicate any recovery signs?
A) The earnings season is expected to remain more or less subdued. So far, they have in-line though. The green shoots of recovery are yet to come forth, and we believe that the process of economic recovery itself may run its course till early 2021.
Recovery in earnings will happen only with a recovery in GDP growth as both these variables are strongly correlated. The only thing is that the expectations on earnings recovery may gather pace well ahead of the event itself. That is why it makes sense to invest as we see the macro variables deteriorating to low levels and may exit as we see earnings peak out.
Q: Does the January Manufacturing and Services PMI data along with November IIP data indicate economic growth bottoming out, and was it the reason for recent rally (post-Budget)?
A) IIP data displays extreme variability from time to time, hence, we may not attribute a high level of reliability to the data for decision making unless it is consistent from period to period as far as the basic trend is concerned.
The fact that the number has moved up to the positive territory is a positive development, but it is in no way an indication of a sustainable recovery. We need to watch the data for the coming three months at least to make reasonable inferences.
The same would be true for PMI too, as it not appropriate to make hurried conclusions about recovery based on just one data point at a particular point in time. The immediate response to the Budget going by the immediate market action was negative but the market recovered soon thereafter on the realisation that given the state of the economy and the constraints, the Budget presented some concrete proposals for improvements in farm incomes, boosting consumption and investment, larger disinvestments, and similar such things, which would all go into supporting the economic fortunes.
There is a strong feeling that both fiscal and monetary measures put together may result in growth bottoming out and the economy funding its support at or near the current levels. It is this fact that lends support to the markets and the underlying sentiment though it does not rule out any fall in the markets in response to specific data or events.
Q: What sectors/stocks will benefit from fast-spreading coronavirus that forced shut down of several manufacturing plants in the world’s second-largest economy China?
A) While the damages due to the epidemic on the whole world will be quite severe, benefits may be quite limited. It may not be a good proposition to estimate the benefits even from a commercial perspective as businesses are not rendered profitable in a sustained way due to such calamities or events. In fact, businesses which depend on imports from China may face issues, including automobile parts, certain chemicals, etc. It may also put some pressure on pharma companies as they may run out of their stocks of antibiotics and formulations meant for fighting viral infections.
Q: Do you expect major rate cut this year as RBI indirectly asked banks to cut lending rates?
A) Transmission is a process that takes time as the benefits of rate cuts do not reach the borrowers immediately. Also, the transmission does not happen in a vacuum. The medium through which the transmission happens is liquidity.
Since the liquidity conditions have improved substantially and we are having a sustainable liquidity surplus in the interbank market the transmission is likely to happen faster. There has only been a marginal improvement in the lending rates of banks for customers as their weighted average lending rates remain elevated with no significant improvements. With the liquidity related actions, measures on linking lending rates to benchmarks etc. the conditions may change for the better.
