With respect to the recovery to 90% and the shape of the balance sheet of corporate India and banks, the jury is out on whether these are sustainable numbers.
By Urvashi Valecha
Markets may have retraced most of their losses, but incrementally, many are turning bearish on the markets at current levels. Though many believe the Covid-19 situation will start normalising in a quarter or two, Unmesh Sharma, head of institutional equities, HDFC Securities, tells Urvashi Valecha and Malini Bhupta why he and his team of analysts are turning bearish. Edited excerpts:
The markets are at divergence with the economic reality of the country and investors are getting jittery about it. What explains the unprecedented rise in the markets and how should one interpret it?
At this point in time, there are three factors driving the market. If you look at select spots in the markets, there are some signs of recovery as far as demand is concerned. Market participants have completely absorbed the fiscal 2021 numbers and are looking beyond that. Now, the discussion is always on FY22. At some level, there is an understanding that the whole Covid-19 situation will start normalizing may be a quarter or two down the line, which means FY22 will be a lot more normal. So, the markets are looking at that.
Central banks globally seem to have underwritten liquidity whether it is the US Federal Reserve or the European Central Bank, to some extent even in India. It is also very evident that it’s what is driving the markets because if you look at fundraises — in the last week, we have had breathtaking activity — $5-$6 billion of paper issued in the market. Anecdotally, you can confirm that a lot of this was the foreign portfolio investors, so liquidity is there. There is also the effect that there have been a lot of openings of demat accounts, so retail investors have become very active. Thus, a combination of liquidity and outlook improving is what is taking the markets up.
What is your view on the economy and how the recovery will be post the actual crisis?
We have advised clients to participate in the current rally and we were overweight on the sectors. But, at the same time, you will see that incrementally our analysts as well as head of research are turning neutral to bearish. With respect to the recovery to 90% and the shape of the balance sheet of corporate India and banks, the jury is out on whether these are sustainable numbers. We have still not tested the hypothesis on two fronts – one is whether this immediate recovery of demand around some discretionary products is the pent-up demand of last three months showing up and then numbers will just taper off to settle down at a new normal which will not be at 90%, but let’s just say 10% below here. We don’t know whether that is happening yet, we are yet to see the evidence which is what is making us skeptical.
Larger banks are well capitalised and hence in a better position to take a hit whenever the moratorium ends. There might be some pockets of stress, even the RBI has done a stress case analysis. If that scenario plays out, then the numbers will start to get a lot worse before they get better. It may not happen at the top banks, but may happen down the chain. Again, this hypothesis remains untested so there is a possibility that we may start to get some bad news as well once things actually start to normalise on both the moratorium and when we start to see the demand numbers come out.
What is the conversation you are having with your institutional clients at this point in time?
The number one question arising in all conversations is where do we have earnings visibility, and what I found is that there is a lot more focus on bottom-up stocks research because I think markets have now come to a conclusion that there is no broad-based approach to the market anymore, it is going to be hugely stock selective. There are questions around availability of capital, the second is which are the companies where we believe that their earnings will continue to play out despite what we hear on de-globalization.
Also, where there are strong structural plays, for example, city gas distribution — gas prices are low, the government is making a huge tip to do it, it’s green and great for the environment, companies are very excited. They may witness some disruption due to Covid-19, but generally nothing changes, so participants are trying to figure out where there is less uncertainty and a better outlook on growth as well as capital.
What is your view on the current market valuations?
We generally avoid talking about overall valuations, but they do seem expensive. To put a caveat, we don’t believe in growth at any price, we don’t believe in buying things at any price. However, the market will continue towards paying a premium to historical valuations for visibility because that is one thing which is scarce at this point in time. To some extent, there has been a convergence in valuation at the bottom end as well as the top end.