What is playing on the market’s mind now? You have got lots of big earnings to digest, there are verdicts from state elections and then India is in the thick of the second wave of Covid wave now.
The first and foremost thing dominating the minds of investors is the Covid wave. We are watching its trajectory. Early signs from Mumbai and parts of the worst affected districts of Maharashtra are clearly positive but the daily deaths are still record high in number. The hope is that over the next couple of weeks the numbers may stabilise a bit. Once than happens, the focus will come back to fundamentals. The earnings have been fairly good but that is a function of what happened in the previous quarter. Right now, all eyes are on government’s measures to stem this crisis.
One cannot calculate how much would be the downside from these levels. All sectors are bleeding and the upside could be capped. What do you think?
From the perspective of 1-2 weeks, there could be a 5-10% downside but if one is willing to have a 12-month outlook, dips should be bought into because the economy is in a good shape. Unlike in the past, we have not seen any significant excesses in the economy over the last four-five years. Once we come out of this current wave and the vaccinations ramp up, things should bounce back strongly. Globally also, the backdrop is very strong and positive for emerging markets including India.
There seems to be a dichotomy in terms of the growth resurgence that we are seeing around the world. How do you see this impacting India?
In the US, because of the transfer of all these income there was excessive savings and consumers back strongly as Covid receded. Consumer spending led to the sharp bounce back in the US economy. We believe that a similar kind of a story may play out in India, though on a smaller scale because we have not seen such huge transfer of income from government to people at large. But then there is pent-up demand.
The only negative is that the second wave seems to have impacted the middle class more and that is where one was expecting a bit of this pent-up demand to come from. But should this wave recede in the coming quarters, we expect the pent-up demand to come back because the economy has not done anything for the last four-five years. Initially, it was demonetisation and then GST came in. We have seen a lot of positive policies from the government to attract investments that should play out in the coming quarters. A testimony to the inherent strength of the economy is the GST numbers, which were very robust and seem to exceed most expectations. So there is an underlying strength in the economy. If we control Covid in the coming weeks, the economy can bounce back strongly in coming quarters.
So do you think retail, discretionary consumption, hospitality and travel segments are good investments now?
In India, a part of this trade got impacted because of the recent spread of Covid but that is where the value is. So if one is looking at it from a 12-18 months perspective, I think there is deep value in banks. In the near term, these names can easily correct by 10%, but if we look at the quarterly earnings and the provisions they are carrying. They have enough provisions to take care of a Covid wave for a month or two, but beyond that it will impact their earnings also. So financials come as a good proxy. We do not have many tourism names besides a couple of listed hotels.
A lot of these consumer discretionary names had run ahead of fundamentals. Auto names were expensive. This pullback gives an opportunity to buy into some of the quality consumer discretionary names. So one would not be too negative on the market. If the Covid wave peaks out in the next 3-4 weeks, as is being expected, the idea would be to move towards domestic cyclicals and take some money off the table from global cyclicals like tech materials which have done very well in the last six months.
