Niraj Kumar, Chief Investment Officer at Future Generali India Life Insurance Company, expects domestic cyclical sectors to outperform traditional defensive going forward.
In an interview with Moneycontrol’s Sunil Shankar Matkar, Kumar said he expects sectors such as banking & financials, metals & mining, capital goods, infrastructure, cement, autos to benefit from the cyclical upswing in the economy. Edited excerpts:
Q: As the market continues to trade near the top, do you think investors are overlooking a potential third wave of COVID? What other factors are at play?
The equity markets have been nonchalant and largely looked through the turbulent period of the second Covid wave in April-May 2021 and have shown strong resilience, with indices and market caps soaring to their all-time highs. This clearly testifies that markets are a forward-looking animal and have risen on hopes of an impending economic recovery and earnings growth, aided by the pickup in vaccination drive and measures taken by the government and the central bank. The markets seem to have priced in the expected earnings and economic recovery, and while the threat of the third wave still looms, it is optimistic that the impact would be transient, as a good portion of the population will be vaccinated with at least one dose. Any flareup in Global and India’s Covid-infection rate may flatten the growth curve and the sentiment and the market is clearly not pricing this currently.
Q: Zomato received a strong response to its public issue and Paytm and LIC are lining up for their respective IPOs; what are the factors driving the primary market? Also, do you think the primary market will see record fundraising in 2021
Investors’ sentiments for the IPO market are no doubt very strong at the moment. Anecdotally, this has been a function of how markets have performed over the past few months & quarters. Post the fund-raising boom witnessed in FY21, the euphoria in primary markets has continued into FY22 as well. Ample global liquidity available at lower costs, coupled with the stellar bullish performance of the secondary markets are indeed the perfect ingredients for successful IPO performance.
Indian markets have shown a strong appetite for primary issuances with entities venturing into the primary markets and raising funds to the tune of Rs 40,000 crore in first half of CY21. We reckon this IPO frenzy would continue to be buoyant in 2HCY21 as well with ample liquidity available and markets being at an all-time high, thus luring promoters to encash on the positive sentiments. We believe the momentum should go on for some more time at least until second half of the calendar year.
Q: With fuel prices on the rise in India, do you think inflation is a real concern for the market?
At the outset, rising fuel prices especially at a point when the economy is embracing for GDP to recover post the impact of second Covid wave, can jeopardize the recovery process. The surge in fuel prices in India could stoke up inflation and hurt consumption as fuel prices can have a cascading impact on the value of many essential commodities and services. People are now confronting a double whammy of rising international crude oil prices and high fuel taxes. The rise in fuel prices is largely a culmination of the recovery in global crude demand, which has accelerated with global economies posting strong recovery, while production is not in line with the demand. Thus it’s imperative to stall the rising fuel prices in India by either reducing the fuel tax rates or bringing the petroleum products under the GST ambit.
Q: Most experts see the US Federal Reserve tapering off bond purchases by 2021-end or beginning of 2022. Do you agree?
As the global growth outlook is on the mend, there have been mounting concerns in the markets around higher inflation coupled with expectations of consequent premature tapering of the balance sheet, which has, in turn, led to a spike in bond yields globally. Fed’s hitherto Dovish stance and stand on ‘Inflation being transient’ had quelled the market fears in the interim and aided to stave off a further rise in yields. However, the rhetoric has seen a change in the June policy with two rate hikes in 2023, thus renewing the fears of policy normalization. Clearly, with the change in the monetary policy direction, the key tailwind to global equities from Fed’s prolonged accommodative stance could soon start to wane.
From the equity markets’ perspective, the timing and pace of interest rate hikes in the US and tapering of the bond-buying program will be imperative, as it could possibly redirect the flows from equities to that of bond markets and emerging economies including India may begin to witness some outflows. Clearly at this juncture, inflation in India and globally is a key concern for markets and the future course of central bank actions would be contingent on the sustained Inflation trends and whether it is transitory or structural in nature. Overall, we reckon as the economy starts seeing recovery, inflation would structurally start treading higher and central banks would eventually start gradual normalization of liquidity in 2022.
Q: Which sectors should be on investor’s radar at this juncture?
We believe the Government & RBI together has rightly laid the foundation for a growth conducive platform that would aid in a major economic rebound for India. The government has clearly prioritized growth over fiscal conservatism, which in turn bodes well for the continuation of the economic/earnings recovery. This backdrop adds credence to our view that that domestic cyclical sectors will outperform the traditional defensive sectors. We remain highly constructive on sectors such as banking & financials, metals & mining, capital goods, infrastructure, cement, autos etc. which will be the direct beneficiaries of the cyclical upswing in the economy.
Besides, sectors that are the prime beneficiaries of Government’s policy reform thrust (PLI & PSU divestments), should do well going forward. We are also positive on telecom as the sector is gradually moving to duopoly with tremendous pricing power in hands of incumbent players. One should also look at new-age technology space where the market size is huge & the opportunity that exists for these companies are unparalleled. While the opportunities in this space are exciting, we need to be cognizant of the inherent risks in these segments and be disciplined in our approach.
Q: What are the biggest risks for Indian equity markets?
Liquidity has indeed been the key catalyst for the rally across asset classes including equity. We perceive any change in stance on liquidity to be a key risk for the equity markets. Given the inflation risks are to the upside with impending recovery in economy and rising commodity prices, the central banks may claw back on their liquidity stance sooner and this in turn may have negative ramifications and create volatility in the equity markets.
Other concern on the markets is that near-term earnings may disappoint on back of surging commodity price which would impact the margins across sectors. Any disappointment on the earnings front could hamper the overall positive sentiments. Besides the incumbent nifty valuations are not inexpensive and beckon for consistent earnings delivery going ahead. Any disappointment on the earnings front could hamper the overall bullish and positive sentiments. Nonetheless, we believe India is on the cusp of a virtuous economic growth cycle and will culminate into stronger momentum of earnings recovery and aid the markets to perform reasonably well. Besides good monsoons and targeted government spends further adds credence to our constructive bias on Equity.
Q: Inflow to equity mutual funds dropped significantly in June compared to May but SIP flow remained strong. What does this indicate?
The regular sticky SIP flows have stayed strong for last few months. On top of it, Retail investors are also adopting the Do-It-Yourself (DIY) strategy in Equity Investing. They have been deploying fresh capital directly into equity markets. This is clearly reflected in the more than doubling of the active Demat accounts over last 12-18 months. The key factor that has led to this kind of surge in retail investor participation in markets is lack of other lucrative investing avenues.
With the interest rates declining & Real estate being subdued, Retail investors have flocked to Equity markets which is keeping the liquidity conditions very benign in the markets. The fact that Equity mutual funds have witnessed good inflows testifies the strong confidence which investors have in stock markets and their willingness to invest substantially. However, the key highlight has been the consistent and rising retail investor participation in markets since the onset of the pandemic in 2020, which has driven the recovery in markets in last one year. With SIP holding up at strong levels, we believe retail investor participation will continue and are likely to have a sizeable portion of the total investments going forward.
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