Our March 2021 target for Nifty is 10,100: Citi India's Abhinav Khanna

'Volatility is here to stay in the near term, for Indian as well as global markets, as a lot is still unknown about the future trajectory of the coronavirus pandemic and lockdowns across the globe'

The markets are on a slow path to recovery after a sharp fall from their peaks which pushed them into a bear phase. ABHINAV KHANNA, head of equity at Citi India, tells Puneet Wadhwa that Citi India Sentiment Indicator (CISI) is now in the ‘buy’ zone from a one-year view — the first time since the period immediately after demonetisation. Edited excerpts:

Do you expect the correction in the markets to resume once they assess the economic impact of Covid-19?

Volatility is here to stay in the near term, for the Indian as well as global markets, as a lot is still unknown about the future trajectory of the coronavirus pandemic and lockdowns across the globe. Unfortunately, the global Covid-19 curve for new infections is yet to flatten appreciably, so it is difficult to be confident that the markets have bottomed. Even when the markets hit a trough, they recover in a straight line. The global risk-off sentiment may continue until we have a clearer picture on when we can reach an inflexion point on economic activity, and a reversal of earnings downgrades.

Any targets for the frontline indices?

Our March 2021 target for the Nifty is 10,100. Our proprietary Citi India Sentiment Indicator (CISI) is now in the ‘buy’ zone from a one-year view perspective -- the first time since the period immediately after demonetisation. However, the markets are likely to remain volatile in the near-term because of lingering uncertainties caused by Covid-19 — in fact, we have a Nifty trough target of 7,600, considering some stress scenarios.

Which are your overweight and underweight sectors?

Our strategy is to gradually ‘buy the dips’ and the general preference being for large-caps over mid-caps. Large overweight on financials and energy, and then smaller overweight on the industrials, health care and telecom sectors. The financial sector's underperformance is a bit overdone, given where the valuations are. We are underweight on consumer staples, metals and autos. For the staples sector, we are not comfortable with the huge valuation premium just for near-term visibility.

How is the mood among your institutional clients?

Institutional investors are still nervous about risk assets, in general, and equities, in particular. The selling by FPIs can be attributed to a combination of re-allocation to safer havens and redemptions. News flow in the public domain about redemptions and wind-downs of a few hedge funds and private equity funds has worsened the already prevailing weak sentiment. FPI flows into India are likely to turn positive only when sentiment across risk assets improves. This is likely to happen only after there is confidence in flattening of the global Covid-19 infection curve, along with better clarity on the actual damage to the global economy, and corporate balance sheets and earnings.

With several sectors now being opened up partially, what is the likely dent on the economy and corporate earnings for FY21?

Our FY21 gross domestic product (GDP) forecast is now 1.7 per cent and we expect a decline in Q1 (-0.2 per cent). The lockdown extension, combined with the likelihood that restarting economic activity while implementing the Covid-19 guidelines, means industries will operate below capacity for at least some time and the recovery will be gradual. A key assumption is that the stringent lockdown is not extended beyond May 3 and that by mid-June, most of the restrictions are removed. We also build in around 1 per cent to 2 per cent of GDP fiscal stimulus, which should provide growth support at the back end of the year. Obviously, the trajectory of global growth remains another key variable that could alter our growth projections. Our India strategist expects flat earnings for the Nifty for FY21, though he expects a 20 per cent decline in earnings in Q4FY20. Thereafter, he expects 15-20 per cent growth in earnings for the Nifty for FY22.

How should investors tackle the financial sector stocks now?

The underperformance of financial stocks has not just been driven by fears of worsening asset quality, but also because of expectations of lower loan growth and fee income. For banks, the FY21 system loan growth can decelerate to around 3–4 per cent from the current around 7 per cent. Credit cost assumptions have also been increased, leading to earnings cuts of 10–30 per cent and target price reductions of 17–55 per cent across different banks. However, the price correction and valuation compression have been too steep. We advised our clients to buy well-capitalised large private sector banks.

… And non-bank financing companies (NBFCs)?

For NBFCs, too, we have lowered our loan growth estimates, and raised credit cost guidance, factoring in significantly reduced business activity in 1H FY21 and some normalisation in the second half of 2020. This has led to our earnings estimates falling 7-35 per cent across our NBFC coverage. However, similar to banks, the share price fall has been steeper, and we have actually upgraded a few NBFCs to a ‘buy’ rating.