The best of liquidity is behind us, says Nomura's Saion Mukherjee

Saion Mukherjee says the market is already factoring in earnings recovery from the June 2021 quarter

The Indian benchmarks — S&P BSE Sensex and Nifty50 — have been on a dream run for the past few months and have hit record highs. SAION MUKHERJEE, managing director & head of equity research for India at Nomura, tells Puneet Wadhwa in an interview that the market is already factoring in earnings recovery from the June 2021 quarter. These expectations, he believes, are elevated and volatility can increase in the coming months. Edited excerpts:

 

Following the US Fed, can other global central banks now look at winding down the easy money policy given the growth recovery?

 

The latest Fed’s minutes suggest that the central bank has almost signalled a green light for tapering of bond purchases in the months ahead. Our economists expect an announcement on tapering from the Fed in December. However, from the market perspective, it is not as disruptive as it was in 2013. The market is aware of taper but it will not be a tantrum this time. The pace of monetary policy normalisation will be the key to watch out for. The key risk here would be if growth surprises on the upside and concerns re-emerge on sustainable inflationary pressures.

 

What is the road ahead for fund flows into emerging markets and India against this backdrop?

 

The best of liquidity is behind us. Fund flows in India and emerging markets have slowed versus CY20 levels. However, concerns have emerged about economic growth in China, as well as financial market risks due to China’s regulatory crackdown on the technology and education sectors. Furthermore, other countries have witnessed a surge in Covid-19 cases, while India has not as yet seen a fresh sharp surge in Covid-19 cases. Therefore, India may benefit as a relatively stable play in Asian equities.

 

How do you see the Indian markets play out over the next few months?

 

Since the peak of Covid-19 cases in India in May 2021, the Indian market has significantly outperformed emerging market (EM) peers. The outperformance is largely driven by expansion in valuation multiples. The earning expectations have largely remained stable. The market is factoring in recovery in earnings from June 2021 quarter (Q1FY22) levels. These expectations are elevated, and volatility can increase in the coming months.

 

Earnings recovery, PLI scheme, and China+1 strategy are all known factors now. What fresh triggers can the markets look forward to over the next few months?

 

On the macro front, the key would be how growth plays out in the coming quarters. Beyond the base effect impact, the market is likely to focus on a sustainable growth rate. Covid-19 had a negative impact on growth with India GDP for 2021 being 10 per cent lower than what was forecasted before the pandemic. There are expectations in the market that government policy actions and favourable liquidity conditions will drive a sustainable growth recovery. How strongly this recovery plays out will be the key.

 

What are the key risks?

 

Covid-19 remains a risk that can adversely impact growth. Consumer sentiment is weak and corporate capex is yet to pick up. These two variables failing to turn positive will present a risk to current growth expectations. Tighter (versus current expectations) liquidity conditions are also a potential risk to the market.

 

Your overweight and underweight sectors…

 

Key overweight sectors are infrastructure, health care, IT services, and select financials. China steel production cuts are positive for steel spreads. However, fresh concerns have emerged on economic growth in the US and China due to the surge in Covid cases. Also, raw material prices are still elevated. Therefore, we’re neutral on metals. We remain underweight on auto, consumer and cement. So far, primary market activity has had limited impact as the secondary market has continued to climb higher.

 

Do you see money moving out of high beta plays into defensive bets like phar­ma, FMCG, and IT over the next few months?

 

Since the peak of the second wave of Covid-19, defensive sectors like IT and consumer have outperformed the Nifty50 Index. This is a bottom-up market where you find divergent stock performances within a sector. This construct can remain. Though we are overweight on IT, we have recently reduced our weighting on the sector given the significant run-up. Pharma has underperformed and we expect a strong revival in quarters ahead.

 

How much can the rising commodity prices dent corporate earnings over the next few quarters?

 

The rise in commodity prices has been a concern. However, the impact on corporate earnings was less as companies were able to take price increases despite a weak demand environment. Supply disruptions also aided this.

 

Do you see the government achieving the ambitious divestment target this financial year? Nothing much has moved thus far in terms of big-ticket divestments.

 

The budgeted target of divestment at Rs 1.75 trillion may be difficult to achieve given Rs 83.71 billion achieved until July 2021. That said, the divestment figure is hard to predict. It is not linear.