Six Factors That Could Keep The Indian Equity Party Going In 2021BloombergQuintOpinion
One belief in early October was that the pessimistic economic view was a rearview mirror influenced belief and the future was going to be far brighter than most could have imagined. In perfect hindsight, it was a glorious call, for markets the world over rallied hard, buoyed in part by flows, but in part by positive sentiment due to the ‘central bank stimulus vaccine’ in the earlier part of the second half 2020 and then the actual vaccine news at the fag end of the year. In fact, countries like Russia and Indonesia, which received lower flows, have also done well in the last two months of the calendar.
The trillion-dollar question is, what’s next? What if, as EM Capital Advisors said in their October post, there is a global synchronous recovery which is typical when all parts of the world are in the same phase of their economic cycle at the same point in time, which is essentially catalysed through significant fiscal and monetary stimulus at work to bring back world growth, which in turn translates into a reflationary environment with a positive tailwind for businesses. And at the opposite end is the argument about valuations, which have skyrocketed for every major market worth its salt.
Analysing the globe at large is impossible, and trying to predict what Indian markets can do is an exercise fraught with risk. However, the forces at play analysed here make for key supports in what may appear to be an overheated market if one looks at the very-near-term. One must remember though, that the smart investor is discounting a slightly longer-term this time around, and that the multiplier effects can be larger-than-expected in the new scenario of easing global trade tensions and dissipation of pandemic fears due to progress on the vaccine front.
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In the pre-pandemic world, imagine a vaccine being the #1 factor for investing. The Covid-19 vaccine may not be a prerequisite for economic output surpassing pre-pandemic levels, but it does to sentiment what a lot of other things cannot. And sentiment staying upbeat is a good thing for investors. Needless to say, let's not dismiss the vaccine as only a sentiment booster. If it opens up travel/offices/dining/entertainment, then the impact on some of the related sectors would snowball with each passing day.
2. Earnings Growth
Upwards and onwards, finally! We saw a glimpse of this in Q2FY21 for India. Yes, the skeptic would argue that you can blame it on how sell-side analysts underestimated the earnings prowess of India Inc. But to be fair, most investors did the same as well. And thus, the surprise in earnings growth was for real. The trajectory of this growth will clearly have the closest correlation to market levels. However, the only pickle out here is that as we stand today, select estimates for FY23E seem to build growth rates higher than the peak growth achieved at any time during the 2013-19 period, across sectors. Will it play out that way, and even if it does, how much of it is priced in?
3. Government Policy
A ‘na bhoota na bhavishyati’ budget? At a CII event on Dec. 18, 2020, Finance Minister Nirmala Sitharaman said the upcoming budget will be unlike anything presented before. Bloomberg News learns that this year’s budget will be increased from its current Rs 30 lakh crore with new spending plans announced on Feb. 1. The same story also maintains that India is set to swing from being a cautious spender in 2020 to opening the fiscal floodgates to help economic revival.
The other refreshing change is the government's approach towards divestment and policy. The rethink on how the stake sales in public sector units are done have helped salvage the falling valuations of PSUs. On Jan. 3, the strategic stake sale of BEML Ltd. was announced. The PLI schemes and others showed that the government has started to think through what will help businesses meaningfully in the short-term as well. This should help business confidence, and that usually is half the battle won.
It was the first vaccine the world got. Prospects of the global liquidity situation remaining comfortable in the coming years are strong. There is no sign yet that leading central banks will take their foot off the gas in the coming year. With everything on liquidity and the vaccine rollout progressing according to plan, investors seem to be looking for the next big narrative that will drive risk sentiment, as the liquidity pullout argument seems to be dead for the time being. And as November and December have shown, swathes of this global liquidity is certainly finding its way into India.
This is an unpredictable element. An outlook 2021 note from Blackrock Investment Institute said: “Previous episodes of rising inflation were costly for investors, leading to higher interest rates that pressured valuations across asset classes via rising discount rates. Yet the policy revolution means any rise in inflation from today’s levels will be better for risk assets than in past episodes.”
While there is no way to call this with full certainty, it does seem that slightly higher inflation might be a positive for corporate India (current and expected inflation reflects gaining pricing power and broadening of manufacturing sector inflation which is usually positive for equities), and may not be bad for multiples as rates are unlikely to rise substantially, even if they do inch up incase of extreme spikes in inflation.
6. The China-Plus-One Narrative
Skeptics may argue that India is not the principle beneficiary of this. Data will substantiate those claims. However, from absolutely nothing coming India's way, even if a few projects do, then it is a welcome. Note that Indian companies anyways have a large domestic market to cater to as well. If they can simultaneously get long term contracts, even if at a slow pace, it should be considered positive. Sure, India should ideally attract more of this business, but let us not brush away that which is already incoming.
For select sectors, this seems to be the start of long-term relationships. A contract manufacturer of electronics is setting up manufacturing contracts not just for Indian shores but for exports as well. In a speciality chemical company's case, a large client is shifting procurement from a Chinese supplier to the company for better quality and consistency. These are good signs, and one hopes more will follow.
The joker in the pack seems to be finding the trick to play this seemingly buoyant risk asset cycle. The recent acceleration in Indian markets in the last few weeks is characterized by pro-cyclical sector rotation, led by bank, metal, realty, and high-beta indices. If the combination of loan restructuring, recovery in credit growth, and high-interest rate spreads would catalyse operating leverage tailwinds for Indian banks and the lending industry in general, themes like commercial vehicles, lenders, and logistic players seem to be at an inflection point of a cyclical upturn.
And the pet theme of sectors that can gain from improved trade climate and the China-plus-one narrative are chemicals and downstream products, metals and their products, contract research and pharmaceuticals, and information technology.
These seem to not be themes that have large potholes in their growth path. If flows continue, maybe the party will last well into 2021, and perhaps make it the year of PSU divestment and smoking hot IPOs from India Inc.
Niraj Shah is Markets Editor at BloombergQuint.