Benchmark indices Sensex and Nifty have touched new highs despite macroeconomic concerns. What are the reasons?
Globally, we believe that the bullish trends will continue given massive unleashing of liquidity both by the government and central banks. The size of four largest central bank balance sheet has expanded from about 21 trillion in March 2020 to currently 27 trillion USD. This synchronous "print and spend" by policymakers and government will continue until growth, inflation and unemployment move to acceptable levels.
On the domestic front, positive macros factors outweigh concerns. One, we have seen the best year in 17 years on current account/ balance of payments front. Infact, during the pandemic, India's forex reserves have expanded to all time high. Two, Interest rate are at all-time lows which is extremely positive for equities – for e.g. we are already witnessing demand improvement in housing owing to low rates. Three, we have seen rural strength on account of many initiatives and favorable monsoons. Lastly, on account of various initiatives and reforms India is well placed now to capitalize on manufacturing growth and taking advantage of China plus one opportunity.
Your outlook for 2021
We do believe that valuations to be reasonable from a long-term view, i.e., 3-year viewpoint considering low interest rates. However, markets can correct/consolidate in near term given the strong rally, but overall glide path in 2021 will remain positive as markets will lead the ongoing recovery in economy and earnings.
We believe that over the next few years India is at the cusp of multi-year growth – multiple drivers will lead to mean reversion - these include low interest rates, buoyancy in rural sector, acceleration in manufacturing exports, etc. Also, we expect strong growth in profits in 2021 (Vs pre-pandemic 15-year low level of 2.5% of PAT to GDP)
Sectors to watch out for in 2021
Our strategy is to invest in long term structural opportunities at reasonable valuation. On sectoral basis, we have exposure to financials including insurance, healthcare, consumer discretionary, IT, and telecom. In addition, we also have representation to ideas which are still in the deep value zone.
Which category of funds should MFDs recommend at this juncture
We would advise to follow a well-crafted balanced allocation towards equites with about 70% allocation to large cap funds.
Given the stage of growth in the Indian economy, many companies offer good growth potential. In addition, in few sectors when we put filters of scale, strong franchise reflecting the moats in business and growth potential the choice is limited to large companies.
Generally, improvement in economic activities lead to wider participation in markets as was witnessed during the second-half of 2020. Thus appropriate allocation to midcaps, say at about 30%, would help capitalize on momentum in the small-and-mid cap category.
