The firm believes that investors are relying on the benefits of future growth opportunities to stoke returns, which may not be good investor behaviour.
The firm says it prefers assets that are priced below their intrinsic value and offer attractive margins of safety.
A fundamental driver for equities to rally in the current cycle could be low interest rates or cost of equity, observed Morningstar.
This could be partially justified with record-low interest rates, which have a positive impact on discounted cash flows of corporates.
“This is an unusual market cycle, where on one side, the global economy is contracting by double digits, corporates are reporting losses, job cuts, low or no capex, and weak private consumption. On the other hand, stock markets
are seeing a strong recovery from recent lows and continue to look robust. Risk-averse investor behaviour during times like these would avoid equities and prefer assets such as debt and gold, which tend to do well in terms of protecting investor wealth,” it said.
Some of the high-frequency lead indicators suggest growth improvement over the past couple of months as lockdown restrictions were eased.
Over the short-term, government expenditure is likely to support growth, with expectations of another round of front-end fiscal measures, although fiscal room is limited, observed Morningstar.
Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.
As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.
Support quality journalism and subscribe to Business Standard.