Hemant Kanawala, Senior EVP & Head – Equity, at Kotak Mahindra Life Insurance Company feels MPC (Monetary Policy Committee) may announce additional support of Rs 1 lakh crore through GSAP program and can also provide specific measures for sectors like travel and tourism which are more impacted in the current lockdown.
The MPC started off its three-day meeting on June 2 and will announce its interest rate decision on June 4.
According to Kanawala, developed markets are likely to show strong economic recovery in the September quarter due to the large-scale vaccination program and strong fiscal and monetary stimulus provided by the government. “Hence sectors benefitting from recovery in global economy like IT, commodities and auto ancillary should be preferred,” he said in an interview to Moneycontrol’s Sunil Shankar Matkar.
Edited Excerpts:-
Q: Finally after a three-month of consolidation, the market returned to record high levels. Do you expect the momentum to sustain and push the Nifty towards 20,000 and Sensex near 65,000 mark in the coming year?
Consensus Nifty EPS for FY22 and FY23 are in the range of 700 and 800 respectively. FY22 earnings can potentially see a downgrade due to lockdown announced by various states in the current quarter. This may be partly compensated by strong prices for industrial commodities like metals and petrochemicals. Historically, market has traded for limited period above 1 year forward P/E of 20. Hence it is difficult to make a case for Nifty of 20,000 in the coming year unless there is a big surprise in earnings. Investors should expect more of compounding return in line with earnings growth from current levels.
Q: Do you think the expected recovery post easing of lockdown will help the India report digit growth in FY22, though there is a lockdown impact on Q1FY22?
Nifty earnings are most sensitive to prospects of banking and commodity sectors. In their commentary with announcement of March results, management of leading banks and NBFC didn’t indicate any material deterioration in asset quality during second wave of COVID. Prices of industrial metals are currently trading significantly above the assumption made by analysts in their earnings estimate. Before the current wave, consensus was expecting Nifty earnings growth of around 30 percent. As discussed above, there can be some downside to that but still Nifty earnings can grow in double digit in FY22.
Q: What are your broad expectations with respect to upcoming MPC meet scheduled for three days between June 2-4?
MPC (Monetary Policy Committee) in India and central bankers globally are prioritising economic growth and employment over inflation in the short term. RBI governor has repeatedly assured the investors that their monetary stance will remain accommodative till the growth recovers. Second wave of COVID has made it all the more necessary for MPC to provide additional measures to support growth. To this effect, MPC may announce additional support of Rs 1 lakh crore through GSAP program and can also provide specific measure for sectors like travel and tourism which are more impacted in the current lockdown.
Q: What are the top sector ideas that one can definitely add in the portfolio despite COVID crisis, and why?
Developed markets are likely to show strong economic recovery in September quarter due to large scale vaccination program and strong fiscal and monetary stimulus provided by the government. Hence sectors benefitting from recovery in global economy like IT, commodities and auto ancillary should be preferred. Domestically also the expectation is that pace of vaccination should pick up in September quarter and hence lockdown restrictions can materially ease during festive season. Investors can look at banking and discretionary consumption to benefit from this. Also financial savings is a structural theme and current crisis has made people aware about the benefits of life and health insurance. Hence investors can also look at insurance sector from medium term perspective.
Q: Given the improving economic data points in the US along with easing COVID pressure amid large vaccination, do you think the Federal Reserve can hint about interest rate hikes and slowdown in bond purchases plan in the second half of 2021?
This is a genuine fear in the minds of investors as it can increase volatility in risk assets. When the Fed had announced tapering in 2013, the ripple effects of the same were felt on emerging markets. However, this time Fed has been very categorical and explicit in stating that they are willing to overlook the inflation concerns in near term and achieving full employment and stability in growth is their top priority. As per the current estimates, Fed is likely to hint at interest rate hike in second half of 2022.
Q: India hit $ 3 trillion market capitalisation in May 2021. Do you think the country can hit $ 5 trillion in market capitalisation much before than $ 5 trillion economy target? When can be both possible and what are the drivers for the both?
Markets are slave of earnings. In last decade, profit to GDP ratio for listed companies reduced from around 5 percent to 2.5 percent mainly due to asset quality issues at banks and poor profitability of commodity and PSU companies. FY21 has shown first signs of reversal in that where nominal GDP declined by about 2 percent but profits have grown by 15 percent. If this trend continues and profit to GDP ratio improves towards long term average of 3.5, then it is possible that markets can hit $ 5 trillion market cap ahead of economy hitting $ 5 trillion.
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