What are the key risks to the ‘India story’ that one needs to be aware of?
We are entering a phase of normalisation. With many high frequency Indicators at close to pre-Covid-19 levels, investors will start focusing on the sustainability of the economic recovery. Falling Covid-19 cases, Reserve Bank of India’s (RBI’s) accommodative stance coupled with timely government intervention should provide tailwinds for the economy. We are entering into an earnings upgrade cycle after a long time which should drive markets going forward. However, investors should keep a close check on the actual inflation trajectory and related RBI monetary policy action and exit strategy from current monetary conditions. The key risks pertain around the unforeseen spread of Covid-19. Going forward, if new / more strains of the virus are discovered leading to regional or national lockdowns, it could impact growth in the economy.
Will the market leadership change now?
During the last few months, the market narrative was positioned towards defensives like consumer staples, information technology (IT) and Pharma stocks. These sectors clearly outperformed, while cyclical stocks underperformed. We are now seeing recovery in domestic cyclical sectors like Auto, Banks, Infra and Cement. These sectors are a high beta play, which are likely to gain further traction from the continuous economic recovery. With expected economic tailwinds in the domestic economy and the elimination of US policy uncertainty with elections out of the way, we recommend investors to increase allocation in these growth sectors. Recommend increasing allocation to the BFSI sector and continue to maintain our overweight stance on IT as the digitisation wave is here to stay for a longer period.
How do you see corporate results play out over the next few quarters?
The current quarter will continue with a strong recovery mode, but going ahead one needs to ascertain if the demand sustains. Also, margin pressures will remain a challenge given the increase in commodity prices. We believe Pharma and IT will continue to lead the recovery, followed by commodities like steel and cement. Financial year 2021-22 (FY22) will see a strong rebound as the earnings growth will be calculated from a lower base. Additionally, global economic growth is expected to be more robust, thereby giving an impetus to India’s exports.
Burger King IPO has brought back focus on the consumption story once again. How are you looking at the related plays?
This is a very interesting space with a long way to grow. Burger King and majority of the other quick service restaurants (QSR) companies are only in metro/Tier-I towns. Therefore, growth will be two-pronged. Increased penetration within metros with subsequent expansion in Tier-II towns along with increased volumes from existing stores. We recommend investors to stay put.
Is it a good time to buy / stay invested in commodity-related stocks?
Global commodity prices have seen a sharp rally in recent months due to an early global economic revival post Covid-19. While metal prices have seen a sharp rally YoY, the overall commodity price rise is still modest versus the previous commodity cycles. It is likely that the commodity cycle will remain in an upturn, thus making sense to remain invested in the related stocks.
What do you expect from the Budget in 2021?
Budget 2021 should ensure that the recovery momentum is sustained. Provisions to increase public spending on infrastructure is essential as this has a multiplier effect on other sectors. Additionally, we have seen an uptake in real estate demand post measures like stamp duty reduction, incentives under Pradhan Mantri Awas Yojana (PMAY). Similar benefits if provided sectors to sectors such as Auto and Consumer durables, would help in demand revival. Overall, we believe it will be a growth-oriented budget with focus on boosting manufacturing in India.