‘Market seems to be ignoring a possible recession in FY21’

India has been one of the most attractive markets for foreign portfolio investors (FPIS) because of good growth and a better return on capital employed (ROCE) than its emerging market peers, SAMPATH REDDY, chief investment officer at Bajaj Allianz Life, tells Swati Verma in an interview. He believes the country may be headed towards a recession in FY21, something the market is ignoring. Edited excerpts:

How long will markets continue to ignore the reality of economic contraction in India?

The market seems to be ignoring a possible recession in the financial year 2020-21 (FY21) and is factoring in a quicker recovery. We have seen healthy recovery in high-frequency economic indicators since the economy started opening up, although it is yet to be seen if the momentum continues, and is not just because of pent-up demand. Another factor that has contributed to the market rally is strong global liquidity, which has been fuelled by large fiscal stimulus around the world. They are also anticipating an improvement in corporate earnings from Q2FY21 onwards. The progress in vaccine trials has also contributed to positive sentiment.

What’s the mood among foreign investors ?

India has been one of the most attractive markets for FPI investments because of good growth and better ROCE as compared to its EM peers. Given the healthy long-term fundamentals for India, we may continue to see strong FPI equity flows over the years, even though at times some of the risk-off events may lead to moderation in the pace/quantum for a short period. Some of the factors that will decide the trend of FPI flows into India will be the monetary policy stance of global central banks, geopolitical tensions, the pace of economic recovery, and if a second wave of Covid cases happen.

How was the June quarter earnings season for you?

Given the muted expectations for Q1FY21 as a result of the effect of the lockdown on corporate earnings, the market has not been paying much attention to them. The commentary from the corporate sector has been encouraging, with many firms quickly adapting to the work-fromh-ome method wherever possible, and have also taken cost-cutting initiatives. Most firms have also been focusing on conserving capital, and have raised liquidity levels. Overall, the commentary is positive and firms have taken many steps to tide over the slowdown.

Your sector preferences?

We have been positive on both the IT and pharma sectors. Given the cash-rich balance sheet, high ROE, and attractive valuation multiples, the IT sector is likely to be better placed. The pharma sector is coming out of the long down cycle, led by easing of pricing pressure for generics in the US market. Further, firms have shifted the focus to a profitable domestic pharma market along with exports. We are also positive on fast-moving consumer goods. The sector may do well selectively as demand remains strong, even though valuations are elevated. We are also positive on telecom, where average revenue per user has bottomed out and the sector will benefit from increased digital adoption. Select stocks in the agri/rural space have been resilient to the pandemic.