DAILY VOICE | Indian equity will always command a premium compared to the EM MSCI Index: Sanjay Sachdev of Freedom Financial Services

Market Outlook

Sanjay Sachdev, Managing Director at Freedom Financial Services LLC, feels that India will command a premium compared to the EM MSCI Index in the long term due to the pace of economic growth compared to other emerging markets.

Sachdev, who has over 30 years of experience in the global financial markets in various leadership positions building asset management businesses. He is also a senior advisor at many private institutions, including a UK-based private equity fund.

In an interview with Moneycontrol’s Kshitij Anand, he said when returns are extraordinary for one year, it’s a difficult adjustment for earnings growth to catch up and therefore, the probability of similar returns in the near term may be lower. Here are edited excerpts from that interview:

Q) After the initial sell-off by FIIs in the first week of March, things seem to be stabilising now? Which phase of the bull market are we in?

A) The bull market has stayed on track primarily due to the tremendous glut of FII funds flowing, but over the last month we have seen some outflows.

For the 5th straight month, we have seen GST collections above Rs 1 lakh crores at Rs 1.13 Lakh crores during February 2021 which is 7 percent higher than the same period last year.

This is a clear indication of economic growth reversing back to mean. India’s economy seems to be moving back to Pre-COVID levels.

The RBI and other global forecasting agencies have revised India’s economic growth projections above 10 percent for FY 2021-22 thus bringing two years of growth effectively averaging out to 3-4% which is much better than most other countries around the world comparatively.

The key driver of this growth is the government’s decision to increase money supply during the pandemic times and that has helped the market stay in a positive zone significantly.

However, we need to be cautious as the US Bond Yields are rising and globally, inflation can be a big threat to the positive market sentiment and hence FII flows. This can lead to an adjustment in the markets in the near term.

Over the long term, however, India will always command a premium compared to the EM MSCI Index due to our growth rates compared to other Emerging Markets.

Q) The financial year FY21 is coming to an end and Nifty50 has rallied by about 30%. What really stood out for you in the last 12 months?

A) Reversion to the mean is what stands out most especially when one looks at the high returns of all the benchmark indices.

Traditionally, when returns are extraordinary for one year, it’s a difficult adjustment for earnings growth to catch up and therefore, the probability of similar returns in the near term may be lower.

Over the medium term, returns will tend to move towards long-term averages. The odds are high that we will see more volatility due to a rise in global commodity prices later this year.

Q) Where do you see markets heading in the next financial year? Any target which you have for Sensex, and Nifty?

A) The Union Budget in February 2021 has been positive for equity markets. Equity market sentiment has been buoyed by the lack of any increase in income tax, the push for growth, and a resurgence by the government to focus on privatization.

The key themes of the budget, as highlighted are — very gradual fiscal consolidation glide path with looser-than-expected fiscal deficit targets, good quality of spending mix and reasonable assumptions on fiscal math and focus on privatization, asset monetization, and long-term funding for infrastructure investment.

We expect EPS growth for some key segments such as Auto& Auto Ancillary, Chemicals, Infrastructure, Industrials, and Construction related sectors to go back to the 9- 10 percent range while some other sectors will struggle.

Q) Small & Midcaps came to the limelight in FY21 and do you think the momentum will continue in FY22 as compared to Large Caps and why?

A) 2021 seems to be a year of economic revival with GDP growth rates closer to double digits due to the government’s liberal but pragmatic policies on the economic front.

Notwithstanding the low base, the economic revival should usher in stronger earnings growth. In a year of strong earnings growth, mid and small caps tend to see market earnings growth and an opportunity for re-ratings.

Moreover, many small companies have embarked on prudent cost-cutting measures by reducing their debt from their balance sheets after coming out of Covid.

India is currently witnessing a V-shaped recovery so companies in Auto & Auto Ancillary, Chemicals and Technology especially in the mid and small-cap segment are expected to grow faster than large-cap companies.

Q) Any event or risks which investors should watch out for in FY22?

A) While domestic DII fund flows have continued to be negative for many months now, a reversal of FII inflows due to rising yields in the US or strengthening of the USD due to the rise of oil prices as well as lower exports may trigger a correction from current levels.

The rise in the price of Commodities and especially Oil is a very big risk for India and Indian businesses. Trade wars could also impact the stock markets in the short run.While high barriers to imports can artificially provide a good boost to Indian businesses in the country for some time, it may not allow them to be globally competitive in the long run.

Q) Which sectors will hog limelight in FY22 and why?

A) Sector-wise, new IPOs in new business areas such as gaming and digital will witness high demand while other high growth sectors such as Healthcare, Auto and Auto Ancillary, and Industrials are expected to continue doing well in 2021.

IT companies are also winning big transformational deals. Similarly, the healthcare and telecom sectors have seen massive changes. Business models are set to evolve further and stocks in these sectors will continue to outperform.

Q) Are there any vaccine plays which investors could look at in the next 6-12 months?

A) The temperature sensitivity to maintain the efficacy of a vaccine calls for reliable, fast, and secure logistics partners who understand the importance of cold chains. Biotech, Healthcare, Logistics, and Airlines, Hotels are the key stakeholders that are worth exploring.

Q) Do you think more retail investors will join D-Street in FY22? They made it clear that the new age investors are well informed and know about the products.

A) There is a fascination to invest in equities combined with the fact with interest rates so low it has almost become a necessity to allocate some part of an investor’s portfolio in the markets and take some calibrated risk to generate a decent return.

Almost 42% of the population in India falls under the age group of 25-54 years. This younger population group of 25-54 years seems to have a high-risk appetite and has started investing in equity mutual funds.

However, there is a lack of understanding of risks associated with investing directly in equities compared to either Mutual Funds or ETFs s and that may possibly lead a lot of investors to burn their fingers and learn the hard way.

We are already seeing that SIPs are witnessing consistent redemptions month after month for the last nine months and that is not a good sign.

Regardless, I am optimistic that we will continue to witness growth in financial savings and investments in the markets for years to come with a relatively younger population that has disposable income to be able to invest in the markets.

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