Indian Market Probably In Its Last Leg Of Rally For 2021: BofA’s Amish Shah

After a year of unexpected turbulence and gains, the Indian equity market is in the final leg of its rally, according to Amish Shah, India equity strategist at Bank of America.

The new calendar year is likely to give mere single-digit incremental returns to investors, he told BloombergQuint’s Niraj Shah in an interview. A large part of the economic and corporate earnings revival is already known and priced into the markets, he said, adding the market currently expects 40% growth in Nifty 50 earnings for FY22 and another 20% in FY23. Even the vaccine rollout and several government policies to promote manufacturing and growth have been priced into the current high valuations, he said.

“We are not calling for a market correction, but minimalist returns,” Shah said, adding there are several trigger points that the market is currently ignoring. Bank of America has set 15,000 as the target for the Nifty 50 in 2021. The benchmark had rallied more than 90% after March 2020 low to reach the heights of 14,753 but dropped 4.6% in the last few trading sessions.

“Even if you see historically, all 50 companies in the Nifty don’t report growth. Currently, the market is pricing in growth from them all,” he said, referring to the earnings outlook. At the same time, commodity prices are likely to keep increasing, which could put pressure on company margins if they absorb the higher cost, or volumes if they manage to pass it on to consumers. Company overhead costs, too, will rise as the economy normalises, he said.

Apart from earnings, the news around vaccines — how effective they are and how efficient the rollout is — could lead to corrections. “Markets are not bothered right now because it seems to be going fine and I’m not saying they will not be fine, but these clearly risk out there.”

Budget Expectations

Shah expects the government to show a “growth budget” on Feb. 1, with the fiscal deficit expanding to 5% of India’s GDP.

Credit agencies across the world understand that governments need to expand their fiscal deficits amid the pandemic, he told BloombergQuint, adding they are likely to take the said expansion in their stride. If, however, there is no change in growth outlook despite a wider fiscal or if there is no visibility on how the debt-to-GDP ratio would come down, the agencies may be concerned.

“We think the government will work on demand- and supply-side measures though we think supply-side measures will be more compared to demand-side,” Shah said. The policies, according to him, will likely be more capitalist rather than socialist in nature.

Sectors such as hospitality, which have been heavily impacted by Covid-19, may get a temporary subsidy to help them transition back to health but the government will stick to its trend of moving away from subsidies. It will reiterate its intent on PSU divestment and privatisation, he said.

Shah also expects the government to levy a “Covid cess” on the high-income bracket and use this to reduce taxes for the lower-income groups.

Besides, he hopes to see the government expand its capital expenditure for the financial year as it contributes towards economic growth, employment and has a strong multiplier effect.

Watch the full conversation here: