Given this, my longer-term view on the Indian equity market remains positive, but the possibility of a relatively minor market correction and considerable volatility in the near-term cannot be ruled out. With the forward-looking equity multiples being close to fair valuation, the big driver for the market from this point onwards would mainly be corporate earnings.
Q. Many expect the action to shift to the broader market now on the back of strong economic growth. But in reality, the economy would be back at 2019 levels only. Do you think this euphoria is misplaced?
We are already seeing the broad market outperforming the narrow market and I expect this trend to continue. While there is a strong correlation between economic growth and corporate earnings
growth, one needs to realise that corporate earnings
growth is far more cyclical versus economic growth. Consequently, during the up move of the business cycle, corporate earnings grow much faster than economic growth.
This is happening in India right now. For example, while the Union Budget has pegged the nominal GDP growth for the next financial year at 14.5 per cent, the consensus expects Nifty 50 earnings to grow by 40 per cent during the year. As I suggested, the phase of the business cycle should result in an expansion in corporate profit margin and therefore faster growth in profitability versus corporate sales. A major reduction in the corporate tax rate in September 2019 would also result in faster growth in corporate profit versus the nominal GDP. In view of these, I do not think that high earnings growth expectation-led equity market rally and re-rating of equity valuation multiples are really euphoria.
Q. How concerned are you with the spike in bond yields given they are back at pre-Covid levels and are led by economic growth? Would you say this is just a temporary phase?
There has been a major increase in fiscal deficit not only in India but globally. Consequently, the supply of government securities would increase considerably. This increased supply should result in an increase in bond yield. Moreover, at least at the global level, there are expectations of inflation going up. Even though the central banks across the world are unlikely to increase the policy rates, an increase in inflationary expectation should result in bond yields rising.
The increased supply in government bonds coupled with concern that the stimulus measures would result in overheating of the global economy and thereby acceleration of inflation- which are the major reasons for the spike in bond yields. While these uncertainties may continue for some time and impact the financial markets, I expect the governments and central banks across the world to make concerted efforts to ensure that interest rates do not increase much as it would reverse the early signs of growth recovery.
To counterbalance this, directly or indirectly, the central banks across the world are monetising government deficit. Also, central banks including the Reserve Bank of India are undertaking what is known as twist operation whereby short-term bonds are being sold by the central bank while buying the long-term bonds. In this process, the central banks are trying to keep the yield on government securities across the maturity spectrum range bound. On the balance, I expect bond yields to go up over the next couple of years. At the same time, I expect the central banks to take action to ensure that the rise in bond yield is not disorderly.
Q. Which sectors would you suggest investors to bet on in order to get double-digit portfolio returns?
The government is putting particular focus on infrastructure investment including water, power, railways, and gas apart from roads which have been the key focus of infrastructure traditionally.
In view of these, I remain positive on investment themes like capital goods, infrastructure, cement and even realty. Even with the current high valuation, FMCG, Pharma and IT also look reasonably good.
That apart, financials also look attractive both, in terms of growth profile and valuation, at the current juncture. Possible deterioration in asset quality has been more than adequately incorporated in the current prices of the financials. I expect investors to generate a handsome return in these sectors. Besides, some of the deep cyclical sectors such as utilities and materials can also provide attractive returns.
Q. What's your view on the PSU bank space? We have seen a strong rally in most PSU banks. But do you think one should be in that space?
The main concern for the PSU banks is governance. While the consolidation of the PSU banks should help them in terms of financial strength, the governance issue continues. Consequently, I see PSU banks more as a trading opportunity rather than a long term investment theme.
Q. Retail investors have played a big part in the market rallying to these levels. Do you think their participation will continue at the same pace seen in 2020?
certainly have increased participation in direct equities during 2020. A part of this has happened through investors liquidating their mutual fund portfolio.
Since October 2020, mutual funds have been net sellers of equities to the tune of Rs 1,00,000 crore. There are some indications that retail investors
are also increasing their exposure to PMS. Increased retail participation in the equity market is more of a global phenomenon than just a development in India alone. There is anecdotal evidence that households are cutting back consumption in the apprehension of a tough time ahead and deploying some of the additional savings in equities. Despite all these, the exposure of Indian households to equity assets remains minuscule and over the medium term, such allocations can only go up.
Q. How has your broking division performed in FY21? How do you see FY22 shaping up? How big a threat, according to you, are the discount brokerages to the conventional brokers going ahead?
Our broking arms did reasonably well during the last one year. The broking business
is a function of market volume rather than market direction. The increased exposure of Indian households into equity assets, both directly and through collective investment schemes, are likely to go up which makes the outlook for the overall broking industry positive. At the same time, because of numerous reasons, the brokerage rates are coming down while the costs, particularly technology costs, are going up. So, it is really a fine balance. Everyone, the discount broking houses as well as the conventional ones are investing heavily in technology to make their transaction and execution platform easy to access and a seamless experience at an investor level.
The comparison between full-service brokerage and discount brokerage is not appropriate. They work on two completely different business models; the discount broking house works for investors who just want an execution platform while the conventional brokers invest hugely in research too along with technology which enables them to showcase data backed by strong research methodology which then enables the investor to make a much-informed decision.
Q. Over the next couple of years, do you see more asset managers list at the bourses? What are your plans?
The asset and wealth management business in India is undergoing rapid growth and transformation. This is attracting a lot of investor attention. Consequently, the owners of these businesses are unlocking some of the value through listing in the public market. The need to make huge technology investments is also another reason for asset management businesses to look for raising money through the equity issuance route. So yes, issuance in this space can go up.
For us, such possibilities remain in the realm of consideration. Our focus, however, remains on building business and creating value in business. Creating value proposition for our clients through uncomplicated and profitable research on different products and increasing use of technology to improve our offerings, client experience -including ease of decision making and trading by leveraging technology and solid research and data-based solutions are our primary priorities.
We are sure that if we create value in our business proposition, the opportunity to monetise will arise. So, the question is not if but when.
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