Post-pandemic equation: Economy unlocked = market unleashed

Market Outlook

The current market look-up, amid a largely locked-down economy, is reflective of its resilience rooted in an inimitably futuristic approach.

Given this toughness that factors in the inherent value prop of the India story, it is not difficult to imagine the market surge post an economic bounce back.

Already, we have enough supporting cues hinting at an economic revival. The post-opening up trends in China and US are a good indication of what India could achieve once the lockdowns become a fading memory.

Improvement in global corporate earnings is at a record high. EM earnings estimates are also catching up. The second wave has peaked, and we are on the verge of opening up in a phased manner.

The situation on the vaccine front is looking up. We reckon 80% of India’s adult population will be vaccinated by March 2022. Q4 results have been encouraging, with many companies recording healthy revenue growth, even after adjusting for the low base of last year.

Pandemic-enforced swings and austerities have triggered many key positives. While many companies have gained from an unorganized-to-organized market shift, price hikes and previous year’s prudent cost management have helped offset the raw material price rise.

For many players, swift digitalization has led to significant market gains and cost savings, which look sustainable going forward.

Factoring in accelerated growth in FY23, I see Nifty touching 18,000 by December 2021. The broader market will also reflect remarkable strength over time.

Talking of Nifty, the top 10 heavyweights, which have been dormant for a while, are likely to resume their upward march. Reliance Industries has already begun its ascent after a six-month lull.

Talking in terms of sectors, banking seems all set to rise from its languishing depths. ICICI Bank is likely to lead the way up.

Talking of potential threats to market momentum, much has been made out of the looming taper tantrums. They are not a new phenomenon. We’ve witnessed them in the past as well.

We believe the market will continue to surge ahead given that taper tantrum is yet to commence. Moreover, it will be gradual.

The slow rise in the cost of capital will not impact the equity story, especially when accompanied by accelerated earnings.

I don’t see any worries surfacing on the valuation front. For one, it is imperative to look at valuations in the specific context of cost of capital.

Secondly, I strongly sense the momentum prevailing over the next four years, given strong and de-levered balance sheets, robust base of operating revenue, sustainable cost savings, and lowered effective tax burden. For sound businesses, ROCEs will inch up structurally. The cycle has only just turned for small caps and midcaps.

What does all this mean in the context of trading and investment decisions? I have simple advice for retail investors: place your faith in quality names. Do not fear volatility, simply be wary of it by doing what you do best. Don’t try to mimic the master traders who make big money out of volatility. That calls for a rare skill.

Big money is a reality, so are stop losses that are triggered equally fast. Look at volatility as your long-term friend. It offers you excellent entry points and you have a chance to build wealth using the tried and tested way, with time on your hand, not glamour.

Gainfully focus on individual stocks and their respective earning trajectories. It is always difficult to predict which sector will make the next move. The best option is to evaluate the universe top-down, narrow down on a few promising sectors, choose the winners among them, place your bets, and wait patiently.

If this sounds easier said than done, consult market experts who monitor price movements to look for over-bought and over-sold levels and create customised indices to decipher trends, among other evaluations.

Keep an eye on the pandemic-hit sectors like hotels, multiplexes, and specialty retail spaces where the unlock theme is already at play and the prospects are nothing but bright. At the same time, be heedful of the fact that some of the players in aviation, hotels, and multiplex may need to raise more capital to further their growth plans.

A key sector to watch out for is the building material space – cement, PVC pipes, home improvement, and paints. It is pertinent to note that the fast-moving affordable home inventory is a trump card for real estate players with strong balance sheets.

Gas utilities are likely to witness a volume pick up with the reopening of industrial units and CNG offtake. Consumer electricals is another upbeat space, given rising demand of cables and wires, as also home demand for small consumer goods.

Talk of Covid and one has to necessarily talk of insurance. I expect the life insurance space to record healthy 14-16% CAGR in premium collections. The protection business will see higher growth, given the humungous protection gap that pervades our country. Covid has created a strong pull for pure term plans.

On the savings side, ULIPS and guaranteed return products will continue to be in vogue, given the strength in equity markets and a weak interest rate environment.

All listed franchises in this space are renowned corporates. Yet, it is important to track for incremental changes in product mix, the strength of distribution channels, healthy RoEVs, and improving quality of EVs, as also valuations.So, are we going to see a massive surge in retail participation (and dominance) going forward, like the one in developed markets like US, where direct participation through ETFs and mutual funds is remarkably high? We saw what happened with GameStop on US exchange, where retail investors managed to effectively corner institutions.

Well, this utopian possibility is a function of time, but yes, structurally, we will see a rise of direct retail volumes in India. In fact, in the mid and small cap space, HNIs already dominate many counters.

At the same time, we cannot overlook the resounding impact of FII buying and selling. In 2020, the market zoomed largely on the back of strong FII flows; and even that FPI flow was merely in line with the historical average in terms of market-cap of Indian equities.

Just to give a comparative perspective, FPI flows as a percentage of India Market Cap were as high as 4% in 2003, while the 2020 flows were merely 1.1%. So, the FII effect on the markets is indeed significant and should remain so for the foreseeable future.

(The author is Senior President and Head of Research – Institutional Equities, YES SECURITIES)

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