Interview | Retail participation in equity bound to grow with enhanced financialization of assets and rise in incomes, says Joseph Thomas of Emkay

Market Outlook

Joseph Thomas, Head of Research at Emkay Wealth Management feels the vaccination efforts may become more rapid with several state governments taking the initiative to source the vaccines, as vaccination alone will be able to put an end to the pandemic.

It may not be reasonable or prudent to assume that there will be a very fierce growth in the coming quarters, a high single-digit around the 8 percent to 9 percent level can be safely assumed based on the macro aggregates available to us,” he said in an interview to Moneycontrol’s Sunil Shankar Matkar.

Edited excerpts:-

Q: Do you think the risk of COVID is receding with the consistent fall in daily infections and the expected increase in vaccination?

It is true that in the last few days we have seen a fall in the number of fresh infections and also an encouraging recovery rate. That it is coming down, and so how sustainable it is, will depend on the extent of the testing that is being done, and also the safeguards taken by the people. If appropriate safeguards are taken the spread can be contained as we can see in the case of Mumbai where it is quite effectively contained due to reasonable restrictions on the movement of people and flexibility in the movement of goods.

Vaccination efforts may become more rapid with several state governments taking the initiative to source the vaccine for their respective states, as vaccination alone will be able to put an end to the pandemic. We have a long way to go still as we are a large and diverse geographical territory.

Q: Given the consistent fall in COVID cases and fall inactive cases, should one change the investment strategy now and what are the sectors to look at for investment now, and why?

When one is looking for growth at a reasonable price, there is no need to change the investment strategy, and there is no need to worry too much about the second and the third wave, as the vaccination drive is going to become more intense and widespread with state governments taking the initiative and due to the import of vaccines, as I mentioned earlier.

Also, it is important not to be too much carried away by the sectoral preferences expressed or voiced, but make sure that one is invested into well-diversified portfolios in the managed funds space. The midcaps and select smallcaps may do better, and that is the space one should be looking at. Broad-based economic recovery, especially after the fears of a third wave abates, will benefit such companies which are in a growth phase. However, the investments may be done in a staggered or phased manner.

All major sectors are bound to perform fairly well, in an economy that is going to expand, with a demographic and consumer base that is large. But there may be lags in the performance of some sectors, which is quite a normal thing, facilitating some amount of sectoral rotation. During the first wave of the pandemic, pharma and healthcare, technology, etc. delivered good performance immediately after the fall on March 2020. There was a lag in the performance in banking and financial services. It was compensated for by a rapid rise in Bank Nifty from September 2020 onwards. As of now, one may have to have a close watch on auto and banking as the revival in consumer spending, the level of NPAs in the banking system post-pandemic, etc. are factors that will be critical for the quality of the recovery in these sectors, but they are very dynamic variables. But sectors like hospitality will take a much longer time to recover from the pandemic shocks.

Q: With the expected easing in lockdown from June, do you think the market will be back to record levels soon? Is there any chance of 55,000 on the Sensex in 2021?

What you have indicated is a just 10 percent up-move in the index, which is a possibility, whether it is probable would depend on several critical factors. There could also be corrective downward movements emerging from time to time, which could also be of the same magnitude as you have indicated of the upside. Apart from the recovery from the second wave and the easing of restrictions, the liquidity conditions, the level of interest rates, the inflationary expectations, developments in the global markets, the likely start of the fiscal and monetary normalization process in the US as well as in India, are all things that would determine the direction which the market would take in the near future, though economic growth and earnings will be the fundamental drivers. The easing of lockdown may bring in greater certainty about the future.

Q: Do you think with easing lockdown restrictions and opening of economy, the earnings upgrade will be more than downgrades in coming quarters and there could be restoration to previous FY22 earnings estimates?

The probability for earnings upgrades will be good, but for that, we need to see a higher rate of economic growth coming back because earnings are closely linked to the rate of GDP growth. Also, for benefits in valuations like the expansion of valuation, easy liquidity and lower interest rates are a must. We may be able to see some improvements in the third or fourth quarter of this year, given the fact that manufacturing and industrial growth is in deceleration, and recovery in this segment is inevitable for economic buoyancy.

Q: MF inflow into equity declined in April compared to March. Do you think there could be strong MF inflow going forward with the hope of economic recovery going forward?

What has been relatively more stable in the mutual space has been the inflows through systematic investment plans. It will continue to be so. Much of this money is retail in nature and retail investors and the mass affluent have experienced the benefits of consistent and long-term investment in equities through SIP mode. Retail participation in equity is bound to grow with enhanced financialization of assets and rise in incomes. Recently, some investors have been doing some profit booking on seeing high index levels with the intention of getting back into the markets once the markets undergo some correction. The investor participation through SIPs will be stable to higher from a longer-term perspective, but the potential behaviour of those entities who invest in lumpsum would depend on their perceptions about the economy and markets.

Q: With the expected easing in lockdown, do you expect double-digit economic growth in FY22?

Economic growth for the whole year has been now marked down by almost 2 percent by analysts and various institutions and brokerages. This downgrade is the result of the expected loss in output and demand due to the lockdown conditions. As you may observe the lockdowns have been less rigorous in some parts of the country but stricter in other parts. There have been many factory and plant shutdowns too though not on a large scale. These are going to have an impact though not as severe as it was last time. From a low double-digit, the growth rate has been revised downwards to a high single-digit. It may not be reasonable or prudent to assume that there will be a very fierce growth in the coming quarters, a high single-digit around the 8 percent to 9 percent level can be safely assumed based on the macro aggregates available to us.

Q: Should the market be really more worried about risks of inflation (domestic and global), interest rate hikes, bond yields and the US dollar now?

Yes, definitely. These are the things that do matter to a large extent. The risks of inflation in India are elevated even after we got the CPI number at 4.29 percent for last month, followed by a ten year high in WPI. The high commodity prices, the weaker Rupee, the high price of oil, are the factors that may cause prices to stay high. While a widespread monsoon and good crops may contain this to some extent, the prices of pulses and protein-rich foods may remain a threat. Sustained high prices may lead to policy changes consistent with the priorities relevant from the stability perspective by the central bank, but any policy change may happen only as growth becomes visible and sustainable. Therefore, the prospects of central bank action towards normalization remain moderate at this point in time but may accelerate as we move into the latter half of the year.

The ten-year benchmark yield in the US has already moved up to 1.65 percent and it is likely moving towards the 2 percent mark soon. US GDP growth for Q1 came in at 6.40 percent, and the CPI for April was at 4.20 percent. Both these aggregates indicate a certain amount of buoyancy, though unemployment is yet to register a significant fall from the 6 percent mark. This is the prognosis of normalization and higher rates in the US, as consistency in these rates becomes more acceptable to policymakers. The US rates are a crucial variable that overseas investors track and base their decisions on. But the fact that India is one of the growth engines for the whole world would present the local market as an attractive avenue for long term investors.

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