How are you viewing market strategy over the next couple of years post the runup?
The single biggest surprise that we found in the Budget was the fact that there was no Covid tax, no inheritance tax, no wealth tax, no tax whatsoever — which I think was a huge positive. I wish they had actually reduced the highest tax bracket down to 33% from 42.7%. But I still think the market is now right for the next leg of its rally and it is not driven only by foreign flows.
If you look at domestic mutual funds and domestic institutional outflows, a lot of that money is getting back into the market via discount brokerage. For example, if you look at ICICI Direct, 70% of their 1.5 million active online subscribers are millennials and that money clearly is sticky at least for the time being and is not going anywhere. So,we see this rally continuing.
As for some of the themes that we are seeing this year, on an aggregate, there are a whole bunch of sectors that really did not participate as much as some of the other sectors did in 2020. For example, last year autos, FMCG clearly did well; real estate picked up towards the fag end of the calendar year as did metals, oils, chemicals, IT, pharma and of course contract manufacturers. But in 2021, cement, retail should definitely pick up on the cyclical side as people get more comfortable visiting stores. Travel and tourism sector has a huge pent up demand. In the last couple of weeks of December and early into January, it was impossible to get hotel rooms.
In telecom, on the back of the Bharti result, the only real stock is Bharti. Building materials is going to be a big area to focus on. A lot of midcap companies within that space should continue to perform well. These are the sectors that we would be watching out for in 2021.
In some of the pockets you have mentioned, we are looking at larger midcaps and not just the frontliners. Does this mean that one will be a little bit more ready to take chances and get into some fresh pockets as opposed to being a little bit more risk off?
That is something which one could have asked even two or three months ago or three weeks ago. There is no right answer to that because besides domestic investors, we have seen a lot of foreign money in calendar 2020. We know that India attracted the most FII investments among emerging markets but that also means that any correction in the United States in the S&P or in the Dow would have an immediate impact here.
My only advice would be to look at those opportunities and add up the stocks you like on correction. So I would be building up a list of companies and sectors that look good based on what we have seen in the Budget and the proposals in the Budget would benefit over the next two to three years.
Ruchir Sharma a few days ago made a case that 2021 could be a year of great recovery for the economy but it may not be a great year for stock markets. 2020 was a bad year for the economy but a great year for stock markets. Have stock markets already factored in the template that we are discussing?
Let us look at the three factors that actually caused the stock markets to rally last year. One of course was liquidity. The amount of money that the United States pumped into their economic stimulus package, some of that came into emerging markets including India.
Secondly, low interest rates the world over. The US Fed has clearly indicated that the low interest rate environment will continue. Thirdly. the TINA (There is No Alternative) factor. These are the factors that caused the rally last year.
Let us look at what is in place this year. All of the above conditions pretty much continue though I would say the TINA factor is not there. People have started deploying money back into residential real estate, not necessarily commercial and we are seeing some alternatives to the pure equity market, specifically in India.
The other factor is there yet another massive stimulus package is coming. We have got a vaccine and more importantly we have got earnings growth. Optically, earnings growth looks a lot stronger because of the weak base but it is genuine. The other factor to keep in mind is that while we have seen phenomenal results for the third quarter FY21, I believe this quarter is going to be critical to test whether it was merely revenge buying or if the demand is here to stay. I think this quarter will be important.
