Equities
As we all can see, the fear has finally come true. India is in the firm grip of the second wave of the Novel Coronavirus (COVID-19) wave. Slowly, most of the states are going for lock down like restrictions, while avoiding a complete lock down.
Vaccination is the only answer and there is something missing this time. According to us, this wave is going to hit the Indian Economy harder than the first wave. Our view is a bit contrary to the general perspective about preparedness by the economy this time – as we have detailed out in the ensuing paragraphs.
The global markets are on the roll with Dow and Nasdaq hitting new highs. Post vaccination, the US economy has opened up and the economic growth is picking up fast. The latest GDP estimate of 6.40% for the USA make a case for the developed markets even stronger.
Inflation in these economies has started inching up but the Central Banks continue to ensure liquidity. We have seen continuous outflows from Foreign Portfolio Investors (‘FPIs’) to the extent of over a billion USD in the month of April 2021. Actually, the selling figures for 30th April 2021 itself are about half a billion USD. This indicates that FPI are not expecting early resolution to the pandemic in India and currently it’s a risk off trade for them. We believe that the media has painted a grim situation prevailing in our country with its poor infrastructure and discontent between Central and State Government. We know that no one expected that any country will be hit by such devastating pandemic and even developed economies including the USA faced such a similar situation, but handled it really well.
We feel that the need for vaccination was known, but the ordering and securing of vaccines fell short, especially when we knew the extent of the vaccination requirement in India. Separately, the lockdown restrictions being quite stringent coupled with the deaths of earning members of the families will impact the livelihood of many families which in turn, will affect consumption (as we all know savings have gone up significantly), global trade is affected, travel and tourism industry is suffering from over a year now. All this will have significant impact on the economy.
Further, we also feel that the vaccination drive will take longer than expected. On the other hand, unfortunately India has over taken several other countries in terms of infections which have now crossed 4.50 Lakh cases per day – and we still may be away from the peak.
We expressed fear about the second wave of the Novel Coronavirus (COVID-19) – on which the nation is yet to get complete clarity. We are not experiencing a nationwide lockdown as of now, but we need to be watchful with past experience of rising COVID cases. Mostly, the Government should be able to get a decent percentage of the population vaccinated by June 2021, which may coincide with a downturn of the curve.
One needs to brace for volatility in the equity market for the next two months. There is absolutely no need to panic and it’s a great time for long term investors to build or rebuild the portfolio. Looking at the nature of the volatility which has become common and more frequent, one needs to keep booking profits at regular intervals. You will see alpha generation if this is followed by keeping on eye on the valuation levels of the market.
Going back to our last market outlook, we have highlighted the following important points:
· Q4 Results are going to be in line with the expectation;
· Value buying will happen in consumer durables, pharma IT and specialty chemicals (For instance, one may check prices of Alykll Amines Chemicals Limited and Balaji Amines Limited);
· Next two months could be volatile and we may oscillate between 14,200 to 15,000 levels of the Nifty; and
· Mid cap and Small cap rallies will continue in April 2021.
Having said that, at the beginning of April we feel that the best part of equity rally is now over and going ahead it is going to be a tough one year for the equity markets. Valuation wise we are trading at 21 times forward earnings which is slightly higher than the long-term average. The dividend yield of Nifty 50 has gone down to about 1% and the market cap to GDP is almost one. Next few months are going to be challenging for traders but good for long term investors. We see economic stress will lead to some stress on banks and NBFCs barring top banks and NBFCs. The top 4 weights of the Nifty as on 30 April 2021:
· Finance: 37.82%;
· IT: 16.53%;
· Oil and Gas: 11.80%;
· Consumer Goods: 11.10%
We see all of them to be moderate in terms of growth, specially on the back of robust growth in the past twelve months. Thus, broader indices may not show much upside from here but there could be a lot of stock specific action. We expect the top ranked fund managers and PMS Managers to generate returns despite these odds.
Recently, I shared my article in Dalal Street Journal where I wrote about investing in US Tech Stocks which has delivered about 8% to 10% returns in the last month itself. In these regards, one needs to understand that the landscape has changed for equity dramatically. Following factors turned against equity in India in last few month:
· Interest rates moving up;
· Inflation rates going up;
· FPI flows turned negative;
· Markets in the fair valuation zone;
· Oil and global commodities hitting life time highs; and
· USD becoming stronger.
We will remain very cautious especially considering the huge rally in mid cap and small caps which can take a breather for the time being. Ideally, we will use any bad day with good corrections to build a long-term portfolio. In the long run, equity will emerge as the best asset class. Exposure to global market with higher allocation to US Tech stocks is advisable on any correction.
We are reducing weightage on equity with slightly lower allocation than your normal allocation. It is advisable to remain in liquid funds for sometimes when you have earned handsomely in the last year.
Another way of staying in equity is to allocate to some sector trends for the next few quarters like a pharma fund, technology fund and off shore funds. Kindly treat above advice as more of a caution, looking at the current situation which is likely to peak out in the middle of May 2021. We will also stay connected in case of any development which may change our view.
Fixed Income
RBI is keen on containing the long-term rates with Operation Twist. Most of the action is concentrated in the 5-year space as RBI will conduct the twist operation by buying securities with maturities of 2026 to 2028 and selling 6-9 months’ papers simultaneously.
Post RBI’s verbal intervention, the year 10 Year G-SEC has remained fairly stable around 6.05% and short-term rates are moving up slowly. We expect short term rates to move up over the next two years gradually and long end shall, albeit slowly, move up inch up to 6.50% but without disrupting the market.
The latest GST collection of Rs. 1.45 Lakh Crore is a song to the ears and will ease a lot of pressure on the RBI. They are confident of completing the divestment plan in this year.
Extra spend on the health infra and lower tax collection, rolling out subsidies to the needy in the pandemic is likely to put pressure on the Govt. exchequer. Looking at inflation levels and growth on the other side, RBI will focus on growth this time around and keep the rates in check.
These are difficult times for any long-term debt investor to select a product and we feel that the middle path is the best way to go. That is, funds with accrual, roll down strategy with moderate duration would help at this stage. One needs to keep some ammunition dry to invest in long term product once the rates go up, over the period of next one year.
Arbitrage Funds with 3 months plus view look attractive once again as short-term rates moving up and markets offering necessary volatility.
