DAILY VOICE | With resurgence of COVID-19 cases, MPC likely to remain cautious, focus would be on forward guidance, says Shibani Kurian of Kotak AMC

Market Outlook
Shibani Kurian of Kotak Mahindra Asset Management Company

Shibani Kurian of Kotak Mahindra Asset Management Company

“In the upcoming monetary policy, we expect that the MPC (Monetary Policy Committee) would keep both policy rates and stance (accommodative) unchanged,” said Shibani Kurian of Kotak Mahindra Asset Management Company in an interview to Moneycontrol’s Sunil Shankar Matkar.

The Senior EVP & Head- Equity Research at Kotak Mahindra AMC feels that with the resurgence of COVID-19 cases, the MPC is likely to remain cautious and continue its bias in supporting growth and keeping liquidity ample.

The MPC will announce its interest rate decision on April 7 after its three-day meeting.

Edited Excerpts:

Q: Market had a strong close in FY21 with nearly 70 percent gains. Do you expect the same kind of trend to continue in FY22? What could be likely market returns in FY22?

Markets in India witnessed a strong run in FY21 but off late have seen volatility. This is largely due to the following factors:

a) Hardening of US bond yields and fear of rise in local bond yields

b) Movement of the USD and the possible impact on global liquidity and flows into India

c) Rising oil prices

d) Rising COVID-19 cases in India

Post a sharp rise in the market over the last year, we believe that some degree of correction is warranted and expected. However, given the current trends, it appears to be unlikely that the COVID-19 situation would lead to a pan India lockdown as was the case last year. There could be some pockets of restrictions which could have some segment specific impact but overall it would likely be limited. In addition, we have a mass vaccination program in India that is making steady progress.

Hence, while it is difficult to comment on the market returns for FY22, we appear to be in a consolidation phase now. We expect corporate earnings to likely remain robust in FY22 and therefore when the expectation is of robust earnings growth, it is difficult to believe that the market will see a very deep correction. So to that extent, we believe that the current volatility should give us opportunities to build positions in stocks where we believe there could be stronger recovery.

We also expect that the market movement is likely to continue to become more broad based as compared to the polarisation seen over the past few years. Midcaps, we believe are more geared towards economic growth. As the growth revival picks up pace, midcap and smallcaps can continue to outperform especially over a long term perspective. However, one needs to be cautious in terms of the quality of the business and the management that one is investing into.

Q: What could be leading factors that can support the market in FY22, whereas what could be factors that can spoil the party in FY22?

One of the key factors determining the movement of the markets in FY22 would be corporate earnings. So far, over the last two quarters, the corporate earnings trajectory has surprised positively with the net profit for Nifty companies recording robust double digit growth after a considerable period. In Q3FY22, Nifty companies recorded net profit growth of 22 percent YOY after reporting 17 percent YoY earnings growth in the previous quarter. More importantly, the pace of earnings upgrades have been higher than downgrades leading to increase in consensus earnings estimates for FY21 and FY22.

However, one must keep in mind that the consensus expectations for FY22 Nifty EPS growth is in the range of 25-30 percent. Hence, any miss on earnings expectation could have an impact on valuations. Apart from earnings, the other key factors determining market direction would be the flow of global liquidity and the domestic policy environment and the pace of execution of recent policy announcements, which are clearly focusing on a more structural investment led GDP growth revival.

Some of the key risks to watch out for would be:

a) The COVID-19 case trajectory in India: The daily number of new cases (7-DMA) has increased from 11,000 in mid-February to around 1,00,000 now. The positivity rate (new cases per 100 tests), has more than tripled over the last 6 weeks. However, the mortality rate has continued to fall, reaching around 1.33 percent last week from 1.43 percent in mid-February and 1.8 percent at the peak of the first wave in September. The pace and progress of the vaccination is key from here on.

b) Any hardening of global bond yields and tightening of liquidity and its impact on currency, domestic yields and consequently valuations.

Q: What are your broad expectations from the Monetary Policy Committee which is scheduled next week? What could be key things to watch out for in the commentary?

In the upcoming monetary policy, we expect that the MPC (Monetary Policy Committee) would keep both policy rates and stance (accommodative) unchanged. While any policy rate action or change in monetary policy stance is unlikely at the April MPC meet, the focus would be on the forward guidance and the views of the MPC on the growth-inflation dynamics. We expect that with the resurgence of COVID-19 cases, the MPC is likely to remain cautious and continue its bias in supporting growth and keeping liquidity ample. The views of the MPC on inflation and the projections would also be key points to watch out for.

Q: The US bond yields have gradually been moving northwards amid likely recovery in the US economy? What does it mean for Indian equity markets and what should be your reading with respect to equity market and FII flow in emerging markets including India?

US bond yields have been inching up on the back of the large fiscal stimulus and expectation of higher inflation. For India, we analysed 5 episodes of yields rising during the last 15 years during which the 10-year yields increased sharply. The Nifty was up in 3 of these 5. We believe that the current state of rising yields is similar to episodes where growth recovery was the key driver for rising yields. Under both those episodes, equities delivered positive returns. Right now, we expect that RBI would likely keep policy rates on hold and liquidity stance would likely stay accommodative.

Globally too as in India, government debt to GDP ratios have gone up. Hence the onus will be on central bankers to ensure orderly movement in the bond markets and reduce volatility. While the trajectory of CPI inflation, the borrowing program and the impact on the bond yields would be key factors to watch out for, bond yield movement would also likely take into account any support from the central bank in the form of Open Market Operations. The other key factor which could determine bond yield movement would be any possible flows into Indian bond markets over a period of time especially if India is included in any global bond index.

Q: What are the key sectors that one should add or continue holding in portfolio for FY22 and what are the reasons behind it?

Some of the sectors and themes that we are positive on include the following:

a) Manufacturing revival: Government policy push, as evidenced in the budget, and the PLI scheme is clearly towards improving infrastructure and investment related spends. On the supply side too policy focus has been towards removing bottlenecks. The labour reforms announced some time back is a step in the same direction. We are therefore positive on domestic cyclicals (cement and industrials), banks

b) Real estate and allied sectors: The other key trend that is sustaining is the improvement in the housing and real estate which is also positive for sectors such as cement, building materials and consumer electricals. Some of the factors driving the improvement in the real estate sector include increasing affordability, all time low interest rates and the policy environment supportive of the sector

c) Supply chain shifts away from China; PLI scheme has now been broadened in order to cover many other segments, the latest announcements being for the pharma sector.

d) Market share shifts continue and the theme of consolidation in sectors and sub sectors remains intact. Clearly the organised sector is benefiting due to a shift in market share from the unorganised space and the companies with strong balance sheets and cash flows are faring much better.

e) The trend in Financialisation of savings and further use of digital technologies remains a structural theme.

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