Broader market will be fairly directionless and sideways: Mark Matthews

With more economies across the globe opening up as the Covid pandemic recedes, MARK MATTHEWS, head of research for Asia at Julius Baer, tells Puneet Wadhwa in an interview that if there is a market correction, his first port of call in deploying more cash would be the structural stories in Asia. Edited excerpts:
 
Do you expect developed markets to outperform emerging markets in 2021?
 
The world stock market has doubled in value from its low in March last year, and we think it now reflects 90 per cent of the post-pandemic economic recovery. At the same time, there is no reason to expect a recession. This makes us believe the broader market will be fairly directionless and sideways. Developed and emerging markets have had the same returns since the beginning of last year and there is no reason to think that should change for the remainder of this year. If there is a correction, our first port of call in deploying more cash would be in the structural stories we like in Asia.

 

Do you expect the US Federal Reserve to start tapering soon?
 
Minutes of FOMC (Federal Open Market Committee) meetings and official commentary in the media make it clear Fed would like to acclimatise the market with the idea that tapering is coming. Late this year seems like a reasonable time to start, as by then the pandemic should be behind the world. Not tapering could also create larger distortions that cause social inequity, for example, in the property market.
 
How big a threat is inflation to the rally in global equities?
 
The sharp increase in inflation will be transitory which will peak in the second quarter around 4.6 per cent, and then decline to average slightly above 2 per cent next year and the year after. Much depends on the incentive higher prices produce. A recent consumer survey from the University of Michigan reported confidence has come down due to higher inflation, suggesting demand can slow down in the months ahead. Adding credence to this idea is that retail sales stopped rising in April. A supply-side response can also be expected.

 
Do you think the risks outnumber the chances for a further upside in the Indian markets?
 
A cursory look at equity indices of any country with a good economy and good companies shows it is normal for them to be at all-time highs. Over time, the economy grows, companies generate cash flows, and so they increase in value. The risks are to the upside with an economic recovery forecast for this year and the next, which will be accompanied by earnings growth of over 20 per cent in both years.
 
What is a realistic assumption of FY22 corporate earnings growth in India?

 
We expect 25-30 per cent earnings growth in FY22, with the key drivers being financials, metals and one-offs, such as Tata Motors. We expect another 20 per cent in FY23. We're overweight on banking and other financial services, consumer discretionary, autos, telecoms and utilities; structurally positive but neutral on information technology (IT) and healthcare; underweight on energy and consumer staples.
 
Are foreign investors taking the Indian official data on Covid, macroeconomy, etc, with a pinch of salt?
 
The Covid data everywhere in the world should be taken with a pinch of salt. In the US, for example, only around 10 per cent of the population has officially tested positive for Covid, but numerous bona fide scientific studies point to 4 to 7 times as many people having it.

 
Do you expect stimulus measures by policymakers to support the economy?
 
We do expect some because the Reserve Bank of India (RBI) has pared back its growth estimate from 10.5 per cent to 9.5 per cent. Recently, Prime Minister Narendra Modi said vaccinations will be free for all adults. We can expect more things along those lines; in other words, the government will identify pockets of society that are stressed and provide some relief. The obvious one would be the rural sector, given the second Covid wave was more terrible there than the first one.
 
Should serious investors include cryptocurrencies in their portfolio?

 
Volatility in cryptocurrency is far in excess of what is acceptable to almost any investor. Most cryptocurrencies, if not all, are likely to fade away over the next decade. On the other hand, it is clear the financial sector will digitalise, as will almost every sector in the economy. If one were to invest in the space, the approach should be to treat it as a venture capital-type investment. That is to say, one would own a little bit of everything, with the assumption that the large majority of the investments will go to zero or something close to that. But a handful will do very well. To say today with confidence which ones will be in that handful is simply impossible for anyone to do.