Maintain a constructive view on Indian equities for 2021: Ashish Gumashta

With a successful breakthrough on the vaccine front, we seem to be moving closer to normalisation in a quarter's time, says Julius Baer India MD

The markets are already factoring in a healthy 25 per cent earnings CAGR over FY21-FY23, says ASHISH GUMASHTA, managing director & chief executive officer at Julius Baer India, in an interview with Puneet Wadhwa. Any disappointment on the earnings front, he says, may lead to market volatility in 2021. Edited excerpts:

What is your market outlook for 2021?

We continue to maintain a constructive view on Indian equities for 2021. With a successful breakthrough on the vaccine front, we seem to be moving closer to normalisation in a quarter’s time. The investment/capex cycle is also expected to pick up in 12-18 months on the back of benign interest rates, better corporate balance sheets, gradual improvement in capacity utilisation, and the government’s increasing focus on infrastructure spending.

The improving earnings outlook, coupled with heal­thy flows, is expected to ke­ep investors interested in equities. Hence, we expect the Indian equity markets to continue to do well in 2021, albeit with inte­r­mittent bouts of corrections. Over the past couple of months, the market breadth has improved, with mid- and small-caps attracting flows. This broad-based participation should continue.

What are the key risks to the rally and to what extent are the markets pricing them?

The key global risks to monitor could be the worsening of the Covid-19 situation, deterioration in the global economic recovery, and contraction in global liquidity. However, a quick rollout of the vaccine should help economies come back to shape faster, with the resumption in large-scale human activity. Moreover, global liquidity support is expected to continue for a slightly prolonged period. On the domestic front, the key monitorable will be the recovery in economic activities/earnings momentum, and the fiscal situation, which has become a bit precarious. With the markets already building in a healthy 25 per cent earnings CAGR over FY21-FY23, any disappointment on the earnings growth front can lead to volatility.

Will emerging markets (EMs) be able to score over developed markets (DMs) over the next 6-12 months?

For the past couple of years, DMs have been outperforming EMs on better growth prospects and flight to safety amid the US-China trade war-related uncertainties. However, we expect this trade to start reversing from CY21, with EM equities expected to benefit from strong global liquidity support, low-interest rates, a continuing risk-on environment, and a depreciating dollar, apart from a much-improved performance of EM economies.

The global economic environment will definitely see an improving trend over the next few months as we move towards normalisation in a post-Covid-19 world. But, it can still be a patchy recovery in a still-low inflation world and global central banks may not risk an early withdrawal of liquidity support. While the monetary policy can provide a framework to prevent financial market shocks, massive fiscal stimuli are now becoming very important for containing a slide into a systemic crisis.

What about India?

FII flows are expected to remain healthy in CY21. First, a weakening dollar because of the heavy fiscal push by the US government augurs well for EM flows, including India. Second, India is seen coming out of the Covid-19 crisis sooner and stronger than western countries that have been hit by a second or third Covid-19 wave. In addition, strong demographics, good monsoon, adequate government and RBI measures to revive growth, and strong forex reserves make India stand out as a potential favoured growth candidate.

Overweight and underweight sectors in the Indian context?

We remain positive on financials (private banks and insurance), telecom, healthcare, chemicals, and consumption. We are also positive on the growth prospects for the information technology (IT) and auto sectors. However, on account of the recent sharp run-up in stocks, we will look for better entry opportunities. The real estate and other related sectors (like home improvement, financers, building material, etc) can emerge as an interesting theme if the recent recovery in the space sustains. We will also keep cyclicals (like industrials/infra) on our radar and watch for any sustained improvement in the capex/investment cycle.

What are your expectations from the government — within and outside the scope of Budget proposals?

The challenge for the government lies in the financing of the stimulus, especially in a scenario where the fiscal deficit situation is already looking grim, tax collections have suffered, and the borrowing program is quite steep. The government certainly needs to loosen its purse strings (allow some fiscal slippages to provide growth support) and focus on higher infrastructure and other capital spends, apart from providing stimulus to promote higher domestic manufacturing. It can also step in with another fiscal package, possibly a bolder one compared to the previous one and focusing not just on the rural side of the economy but also on urban consumption, which has suffered badly due to the lockdown.