The focus in Budget 2021 has to be on driving growth given the economy has been in a consolidation phase for a very long period of time. Hence, I would focus on job creation and capital formation, Santosh Kumar Singh of Motilal Oswal Asset Management Company said in an interview to Moneycontrol’s Sunil Shankar Matkar.
Q) What are your expectations from India Inc’s Q3 earnings? Will the third quarter earnings give a proper indication about FY22 earnings season or should we wait for Q4 earnings as well?
A) Third quarter earnings expectations are boosted by good festive demand and fast recovery in the economy. Also, margins may remain elevated like Q2 given most of the companies may have not reached normal cost levels. Technology companies are expected to report good earnings given a sharp rebound in demand and up fronting of digital spending, which may lead to good growth for the next few quarters. Commodities prices firmed up last quarter which can lead to sectors like metals showing good earnings. Banks may also report good numbers given the impact of COVID-19 is lower than what was expected earlier.
However, I would still want to wait for Q4 to be sure if this is a trend or a one-off due to demand shooting up in the festive season. If it was pent up demand and economy is not as strong as we are thinking it is then Q4 numbers would start normalising.
Q) Nifty Bank index has risen 56 percent in the last three months and is now near its record high levels. Do you think the worst is over for the sector?
A) RBI Financial Stability Report (FSR) is suggesting that the NPLs may shoot up for the sector significantly. A lot of market participants are also forecasting the same. Hence, despite the recent rally a lot of deterioration in the credit quality is priced in most of the stocks barring a few. In my opinion, based on the data coming out from companies and a sharp revival in the economy, we would see a deterioration in the credit quality, but not to the extent highlighted in RBI FSR or by the market participants. Also, barring a few stocks the valuation is still not very high and in some of the segments it is still very lucrative. Hence, I would expect this segment to do well in the current year as well.
Q) What measures should the Finance Ministry take to revive and strengthen the economy?
A) The focus in Budget 2021 has to be on driving growth given the economy has been in a consolidation phase for a very long period of time. Hence, the focus should on job creation and capital formation. For the last few years, we have seen lack of risk appetite from corporates to invest in any area which is asset-heavy. Hence, in order to drive this, the focus would be to create a conducive environment for asset creation. Also, the first participant in infrastructure assets has to be the government. Also, manufacturing would be another area to focus on.
Q) What sectors could be in focus in the Budget?
A) As I said earlier, the focus has to be on capital formation and job creation and the key sectors are going to be Infra, capital goods, manufacturing and real estate. Funding for incremental assets would need a very strong financial sector.
Q) Should investors prepare for A major correction from current levels? Also, do you expect the market to give double-digit returns in 2021?
A) I would not get into forecasting Nifty levels or expected returns. However, broadly the rally has been fuelled by three factors a) High global liquidity b) low-interest rates and c) fast growth in earnings. In my view, earnings may not surprise too much as we may remain in the upgrade cycle for at least few more quarters and the interest rates may remain low as has been indicated by almost all the global regulators. Hence, liquidity would be the only factor which can cause a sharp correction in the market. If liquidity falls significantly then it is possible.
Without getting into forecasting market levels, I expect the earnings growth to get broad-based. Hence, whatever may happen to the market levels I would expect the stock performance to get broad-based.
Q) Which sector/s can give multibagger returns by the end of 2021 or in a couple of years?
A) Markets are going to be driven by earnings and new themes which emerge over the year. We can see earning upgrade cycle continuing in cyclicals for some time also financial sector is another sector where some of the large companies earnings have disappointed for the better part of the last decade, hence, analysts are conservative in forecasting growth. These are the areas where in my view decent returns can be made in the next year. Also, we are yet to see much action in digital space given lack of options, however next couple of years we may see multiple listings and this is the segment of the market which may produce multiple multibaggers over the next decade.
Q) Do you think it is still a buy on dips or the pattern has changed to sell on rallies?
A) We are long term investors and hence we try to avoid timing the market.
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