‘The current market rally may soon run out of steam’

It has mostly been a one-way street for the Indian markets from their March lows. UNMESH KULKARNI, managing director and senior advisor, Julius Baer India, tells Puneet Wadhwa that though the worst may be behind us, the equity markets will likely witness a U-shaped recovery as they need time to assess the damage and assimilate negative data points emerging over the coming weeks. Edited excerpts: Can the markets sustain at these levels?

The intensity of the lockdown in India is likely to take a toll on the country’s gross domestic product (GDP), as well as earnings of Indian companies, and therefore, the current market rally may soon run out of steam. To make matters worse, the Indian debt markets are also seeing one setback after another, with a series of defaults or write-downs of debt, including that in Franklin Templeton. As of now, we expect the global recession will be deep but short, and the fiscal and central bank actions should mostly prevent a financial and economic meltdown. The Indian situation, however, will depend on the duration of the lockdown. Given the extension of the lockdown in some parts of the country and only gradual withdrawal in the rest, it looks like we are headed for a long haul, as far as the healing process is concerned.

By when do you see growth normalising?

Our global economists expect world economic growth to reach pre - crisis levels again in t he first quarter of 2021 (Q1-2021). The equity markets anticipate this already in the second half of 2020, possibly earlier. Against this backdrop, they are constructive on global equities and believe that the markets will trade higher in 12 months. At this point, a deep global recession cannot be ruled out.

… And in India?

In India, the scenario can be a bit different as the economy will take longer to recover from the demand destruction and the supply chain distortion arising out of the lockdown. Unless of course, the government steps in with a large-scale stimulus package to boost demand and consumption. We do not expect the Indian equity markets to stage a V-shaped recovery. Over the next few weeks, there can be earnings downgrades by analysts, alongside the expected slide in GDP. While the worst may be behind us, the equity markets will likely witness a U-shaped recovery, as they will need time to assess the damage and assimilate the negative data points emerging over the coming weeks.

Do you expect more fiscal stimulus to come through from the government?

The ability of the government to dole out any large-scale stimulus to the industry will largely depend on how it decides to finance this. Given the increasing economic risks, we do expect further stimulus. It is quite likely that the government will opt for a targeted financial package, rather than doling out an across-theboard bonanza, owing to the fragile fiscal situation. The saving grace, however, is the decline in crude oil prices, which should result in significant savings.

What is your market strategy now?

We are cautious in the near-term, after the sharp pullback by equities in April. Indian equity markets are likely to trade range-bound in the near-term, and we prefer buying into the dips. From a slightly longer perspective, the current market correction provides a good entry point to investors, with Nifty valuations having corrected to around 17x FY21 and around 14.5x FY22 price earnings (PE), as compared to the long-term average of 17x to 18x.

In equities, we prefer buying into large-cap stocks/funds and i ndex exchange-traded funds (ETFS). We prefer to wait for some stability to return to the markets, as well as restoration of human and economic activity before looking at mid-cap stocks/funds, although there could be some exceptions. Overweight sectors include pharma, chemicals, telecom, and consumption; underweights are industrial & infra, metals, and auto.

How attractive do Indian equities look within the emerging markets (EMS)?

Within the emerging markets, Julius Baer is optimistic about Asian equities, especially Chinese equities. The current outlook for Indian equities is more of a neutral view, given that India had entered the Covid-19 crisis and lockdown with an already slowing economy (over several past quarters), sluggish earnings growth, and not-so-cheap valuations on a relative basis. Valuations may have corrected in the Covid-19 market sell- off, however, it will take some time for demand and growth to recover and consequently earnings, given the severity of the lockdown. For allocation to Indian equities to go up in a relative sense and for foreign investors to turn bullish on India, we need to see more evidence on the ground of the economic recovery taking place at a broader level, and not concentrated in a few companies. On the contrary, more and more Indian investors want to buy global equities and diversify their equity allocation.

WITHIN THE EMERGING MARKETS, JULIUS BAER IS OPTIMISTIC ABOUT ASIAN EQUITIES, ESPECIALLY CHINESE EQUITIES. THE CURRENT OUTLOOK ON INDIAN EQUITIES IS MORE OF A NEUTRAL VIEW