‘Correction is unlikely to be deep or long lasting’

Markets like Brazil and France have done well despite the worsening Covid-19 situation, thanks to global liquidity, says PRATIK GUPTA, chief executive officer & co-head, Kotak Institutional Equities. In an interview, Gupta tells Samie Modak & Ashley Coutinho that despite several near-term headwinds, India offers relatively stronger longterm growth and returns prospects. Edited excerpts:

The Covid-19 crisis is weighing on the market. How much worse can it get?

The markets are already pricing in this spike in cases and also of more states imposing Maharashtra-style restrictions. In addition, there is hope that vaccination will be ramped up, which will reduce risks. There is also a lot of global liquidity sloshing around and many local investors missed the earlier rally – many want to buy on dips. Other markets like Brazil (5,000+ daily deaths) and France (one-month lockdown) have rallied despite the negative news. Hence, any correction in India is also unlikely to be deep or long lasting. The risk to this view is if the situation results in a nationwide lockdown, but that appears unlikely.

The earnings growth estimates for FY22 and FY23 are steep. Will a fresh lockdown lead to downgrades?

We were expecting Nifty earnings growth of 27 per cent and 18 per cent in FY22 and FY23, respectively, before the second wave. Now, there’ll be some cuts to our estimates. In particular, sectors like hotels, airlines, multiplexes, retail malls will be significantly impacted — but these sectors don’t have much weight in the Nifty. However, earnings growth in FY22 and FY23 should still be relatively strong on a year-on-year (YOY) basis – this will be driven mainly by banks (lower credit costs), autos and telecom (low-base effect due to losses at some companies in FY21) as well as metals (strong commodity prices).

The rupee has been weakening against the dollar. Will this act as a headwind?

Over the next few months, the US dollar is expected to do relatively better because of the strong economic recovery there and higher bond yields. So, that is indeed a headwind for some momentum-oriented foreign portfolio investor (FPI) inflows. However, the rupee has already lost about 3 per cent against the dollar over the previous fortnight. It could weaken only gradually for the rest of 2021, given India’s strong forex reserves (at $580 billion) and the expected long-term weakening trend in the dollar. More importantly, India’s corporate earnings growth prospects are still quite strong, which is attracting foreign investors.

Last year, India got more than its fair share of FPI flows? Will that continue?

Most emerging market investors remain overweight on India given our relatively stronger long-term growth and return on equity (ROE) prospects. India remains an attractive domestic consumption growth story, and with prospects of more business-friendly measures (such as the PLI scheme, labour reforms). Also, the recent underperformance versus many Asian peers, we should see strong FPI inflows into equities again this year. The key risk to this view is that of a sharp increase in US bond yields. More on business-standard.com