You cannot complain in this market because it has obliged everybody. I am sure your investors are also very happy. But where are we going from here?
Markets have been very surprisingly quite buoyant over the last 15-18 months, despite the challenging times during the pandemic. The fundamentals are also catching up now. So it is not that we are in an over exuberance kind of space. There are quite a lot of tips floating around. Research on WhatsApp and Twitter are also causing some obscure stocks to move up. But, by and large, the earnings trajectory seems to be pretty decent. We have a good tailwind in terms of the economy doing much better. For a change, we also have the animal spirits from Indian entrepreneurs in terms of growth and capex coming back. So all in all, it looks to be pretty decent even going forward.
The only caveat would be that do not extrapolate the returns made in the last few months and presume that these kind of returns are going to continue. We will have to mellow down our return expectations. But we remain optimistic going forward.
Are US bond markets telling us that the economy will slow down or inflation will come down? Whichever way things go, if commodity prices come down it is bad news, if growth comes down that is also bad news.
When the yields were moving up, people were very worried that it will lead to interest rates going up and therefore a slowdown. And now when the interest rates have fallen in the US, people are extrapolating it as a sign of slowdown. Frankly, I am not an economist. I do not understand this. What I understand is that at this point of time there is excess liquidity and it is going to continue at least for the next few years. Central banks all over the world are very clear that they cannot afford to tighten the economy too much.
We expect yields across the world to be stable around these levels, plus or minus 10-20 bps. I do not think you should read too much into one or two indicators because time and again equity markets have told us that there is no one-on-one correlation with any one or two indicators. The same thing happened in 2003 to 2008 when interest rates were going up and the economy kept on firing. So I would track it, but it would not be the only factor which determines the future as far as the trend in equity market is concerned.
What will determine the near-term direction of the market – flows, earnings or valuations?
It is going to be a combination of all of them. We are in a connected world and a lot of new investors have come in. The news flow is very dynamic. Every investor or trader gets the same news at the same time. They want to react in the same direction almost instantly. Therefore, we are in a highly volatile world.
At the same time, there is a good tailwind. We always say that the markets have gone up 100% from the bottom, but from January 2020 to now we are up about 25%. March’21 EPS for Nifty was expected to be down by 30% but it ended up being up by 15%, which was highest in the last five years. We are 10-12% higher than the long-term average, but we are not exorbitantly priced.
The earnings trajectory should be very strong at least for 2022. It is the combination of a few things. One is that we had a very-very challenging June’20 quarter, so that base effect itself will lead to an earnings growth of 15-20% for this year. And then, the earnings this year is also more broad-based. So rather than only three-four sectors like IT, pharma and consumption firing, this time we have also sectors like steel, cement, capital goods, etc firing.
As far as the banking sector is concerned, the problems related to NPA provisioning have reduced quite significantly. Therefore, that sector should also contribute handsomely to earnings. On top of it, you also have attempt by the governments all over the world to spend on infrastructure. In India, you have the PLI scheme and also the advantage of exports booming because of a shift away from China. So the GDP growth rate looks good.
We have seen huge flows and a huge interest in India. Whether it is in the secondary market, start-ups or through FDI, it helps in GDP growth.
And the last thing is the forecast of a normal monsoon. So I think it is a good potent combination of things looking pretty decent. At the same time, the news flow is going to be very important. We do not know whether a third or fourth wave will happen or not. The first news of an event always has more impact. The same news does not have as much impact (later on). But having said that, we have to keep a track on it. If things go out of hand, then there might be some impact as far as markets are concerned.
The only caution that I would highlight is to stay away from WhatsApp and Twitter research. Every second stock is hitting the upper circuit. That is something which we have to keep an eye on.
