Benchmark equity indices BSE Sensex and NSE Nifty 50 have surged up to 32% from the lows of March, but may not gain much from here, unless supported by strong economic growth.
Benchmark equity indices BSE Sensex and NSE Nifty 50 have surged up to 32% from the lows of March, but may not gain much from here, unless supported by strong economic growth, said R Venkataraman, MD, IIFL Securities in an interview with Kshitij Bhargava of Financial Express Online. India needs the growth momentum to recover to pre-coronavirus levels for the share market rally to sustain. Venkataraman doesn’t expect a V-shaped recovery, and hence expects stock indices to face resistance at current levels. With growth options likely limited in the stock market, for now, Venkataraman reveals the sectors that can outshine; he further tells what needs to be done to bring foreign investors back into Indian equities in bulk. Here are the edited excerpts from the interview:
- Financials have performed a little better than expected despite there being a huge scare of a spike in non-performing assets once the moratorium period is over, why do you think this was so?
Overall financials have underperformed the benchmark Nifty index in the last couple of months (Bank Nifty has rallied ~23% vs. Nifty performance of ~32% from March 2020 lows). That said the rally in the financial stocks has not been uniform. While a few stocks have rallied several others have either remained near the lows of March 2020 or have in fact further corrected. We think this underperformance of lenders is likely to continue on worries of asset quality and funding issues of NBFCs.
- Conventional wisdom is to invest in big guns in the market, which are safe bets, and also defensive sectors. But, is it appropriate to paint all such companies with the same brush or should investors be really cautious even when they go for these sectors or the big names?
While some sectors like Pharma, telecom, and insurance should continue to do well, the outperformance may not be broad-based across the sector. Focusing on select stocks with a good execution track record and healthy balance sheets would be a more rewarding strategy in our view.
- The economic shock is strong, how long do you think markets will take to bounce back strongly?
The markets have already rallied strongly (Nifty is up ~32% from March 23 low) from the lows of March 2020. However, for this rally to sustain, the growth momentum needs to recover to pre-Covid levels. The economy was going through a tough phase even before the pandemic and the epidemic related shutdown derailed the expected recovery. We are unlikely to witness a V-shaped recovery and hence benchmark indices may not have a lot of upside from the current levels.
- What sectors do you think are better placed to lead the markets once the bulls return?
Pharma, Telecom and Insurance are better placed than other sectors, in our view.
- FIIs exited the Indian markets in the last few months but we have seen some recovery now. What will be needed to bring back FIIs substantially?
The FII flows to India have tapered off in the last few years (~US$11bn during FY16-20 compared with ~US$91bn during FY11-15). This could be due to worsening corporate profitability and earnings growth relative to peer EMs. We believe the government will have to announce long pending reform measures and ensure efficient execution of already announced measures. These reform measures should improve the long term growth prospects of the economy and we could see return of FII flows to India.
- Markets have been trading mixed in the past few sessions. Is it all good for markets ahead or were the gains just a bear market rally?
While it is hard to say if this is a bear market rally, Nifty at ~17x 12m forward PE is already trading nearly one standard deviation above long term average and further rise would stretch the valuations to pre-COVID19 peak of ~18.5x. Therefore we believe that the benchmark indices may not have a lot of upside from current levels.
- How have you been trading in these volatile times and what are your best picks to help investors beat a volatile market?
The volatility has seen a sharp rise in the last few months, partly due to uncertain outlook on the economy and earnings. In view of the tough macro environment, we prefer companies with relatively better earnings visibility and strong balance sheets for the last couple of years. We believe this strategy should continue to outperform the market until the growth momentum improves.