DAILY VOICE | Large companies better positioned to ride second COVID wave : IV Subramaniam of Quantum Advisors

Market Outlook

IV Subramaniam, MD at Quantum Advisors, said that a nationwide lockdown will increase the fiscal burden on the government. This in turn will have a negative impact on interest rates that can ultimately hurt riskier asset classes such as equities.

Subramaniam also popularly known as “Subbu” is a market veteran of over 3 decades. Since June 2000, Subbu has been managing India-dedicated portfolios for Indian clients.

In an interview with Moneycontrol’s Kshitij Anand, Subramaniam talks about the impact of the second COVID wave on equities, recent downgrades, cryptocurrencies and more.

Edited excerpts:

Q) The mayhem caused by the second wave has already fuelled worries of a complete lockdown which may havce not been factored in by the markets. Do you think we could retest 12000 on Nifty in case lockdown becomes more stringent?

A) Since many cities and large parts of different states are already in lockdown, a national lockdown at this point appears remote.

The central government has also indicated that states take the call on lockdown. It appears that we have already chosen the path of not going through a national lockdown.

Therefore, any announcement of a national lockdown by the central government may hurt sentiments.

The strong inflows into the equity market may then stop and lead to a correction in stock prices. A national lockdown will also mean more fiscal burden on the government – and its implications on interest rates.

A higher interest rate may then hurt equity prices and Nifty levels.

Q) S&P has already slashed India’s GDP growth forecast to 9.8% for this fiscal. Do you think a downgrade could also be in the offing? What impact will it have on markets as the market was factoring in a V-shaped recovery?

A) A revision in GDP estimates is definitely in the offing. From double-digit growth for FY22, it appears now that the GDP could grow lower by 200 to 300 bps – and maybe closer to 10% or high single digits.

Markets are intelligent — so I presume it is willing to live with a lower growth for FY22 and expects the economy to bounce back fast as it did since the 2020 lockdown ended.

The expectation is for recovery but a delayed recovery. I wish the markets had a way to also express the misery index rather than just economic growth, it would have then clearly reacted by now as it could take a longer period for many people in the society to recover from shocks they faced due to COVID.

Needless to say the poor and the vulnerable would have been the most impacted.

Since most of the rating agencies have given time to countries to recover from the pandemic, it is possible that they may not downgrade India.

In any case, if growth is there then they may not downgrade purely because the debt levels or deficit levels have gone up.

Q) Indian has been an underperformer for the past few months – FIIs turned net sellers in April after 6 months. Is it a rise in COVID cases or is there something else that might have spooked foreign investors?

A) The net selling could just be profit booking after the great run-up in the markets in the last year. Some of the FIIs may have found other markets interesting.

While the rising cases are worrisome, many investors may not necessarily sell out as they may be assuming that the COVID situation will be controlled and that the economy will bounce back.

Within the economy, the smaller companies may be impacted more than the large companies; thus probably benefitting the large listed companies.

Q) What is your view on earnings growth? After steady April – we could see a muted June on a QoQ basis at least if not on a YoY basis. Do you see further downgrades to the earnings trajectory in FY22?

A) The consensus earnings growth for FY22 is upwards of 30 percent. Since there is no national lockdown and some segments of the economy are still running, it is possible that the downgrades may not be very significant.

Moreover, IT, pharma, and metals are doing well so on an overall basis the downgrades could be limited. This assumes that India is successful in controlling the spread of the virus, and the economic impact of the current spread is not very significant.

Q) What is your view on the Cryptoindex? Can it be the next asset class for investors who are looking to diversify beyond India?

A) The launch of such indices makes it easier to track what is happening in the crypto space. Since some level of legitimacy is provided; there might be higher participation from institutions and retail investors.

However, this asset class is largely unregulated and therefore very susceptible to risks. It is very volatile and speculative in nature.

To diversify beyond India it is not necessary to take such risks. There are enough assets available now to diversify beyond India and which is more easily understood and is also less speculative. One could look at global equities.

Q) What are your views on metals that have so far seen a stellar run impacting commodity-linked stocks positively? Will the momentum continue or does it make sense to cut exposure?

A) Many developed countries are seeing economic recovery from the impact of pandemic seen in 2020 led by a better vaccination strategy plus better control on the spread of the virus.

Additionally, these countries have been spending on income support and are planning to spend on infrastructure which could result in higher demand for metals.

This surge in demand without supply resulted in a sharp surge in metal prices.

The situation is unlikely to change in the next couple of quarters and may keep commodity prices at elevated levels. So at this point, it appears that this momentum will continue.

Q) Your 3-5 key learnings from COVID second wave?

A) Some of the key learnings from COVID- not necessarily from the second wave:

– Risks to life and markets can come from most unexpected fronts. One needs to be mentally prepared for such an event;