Despite the serious impact of the COVID-19 pandemic on the Indian and global economy, the year 2020 is ending on a positive note for the investors. Markets are at a new high as we are set to enter 2021. The economy is on a strong recovery path, monetary and fiscal policy is supportive and India is a unique country where active cases are steadily declining despite the withdrawal of restrictions and greater mobility. No wonder, India is finding favour with foreign investors and is among the key beneficiaries of easy liquidity conditions globally.
All is not well; sustainability of recovery could be tested:
Despite an accommodative monetary stance and supportive fiscal policy, it would take a lot more for recovery to turn broad-based and effectively percolate down to the high employment generating MSME segment. In the near term, hopes are pinned on a rise in government expenditure to support an economic recovery, the continued improving trend in Q3FY21 earnings and above all, a growth-oriented Union Budget.
The ingredients are all there, with a supportive macro scenario and strengthened corporate balance sheets at least for larger players. In its recent policy meet, the Reserve Bank of India (RBI) clearly indicated its intention of maintaining an accommodative monetary stance for an extended period with a focus on supporting growth even if inflation stays exceeds the mandated level. On the other hand, the government is moving towards a policy framework to boost the manufacturing sector, by following up the earlier cut in effective rate with a focussed incentive plan under the PLI scheme. The idea is to create a few large manufacturing players with the advantage of policy support (5-8% of value add), scale and world-class technology. Markets would be keenly watching for progress on some of the key initiatives that could trigger a long lasting business up cycle in the country.
Though earnings multiple can be high in the early stages of a new cycle, markets would need to be supported by upgrades in consensus earnings estimates for FY22/FY23 for a sustainable rally. Rollout of vaccines and further doses of stimulus in the major economies globally would also keep the global set up favourable for equities in general. Consequently, we remain constructive on equities as an asset class and look at every dip as an opportunity to buy.
Most investors are anyway sitting on fences or have created some cash in their portfolios lately. Also, the portfolios could do better with some rejig in terms of partially shifting allocation to value picks and/or those sectors that have lagged and are not early gainers of an economic recovery cycle.
NBFCs, Engineering, Pharma, IT Services and select companies in consumer and banking sector.
High conviction investment ideas:
Bharti Airtel, Cipla, Infosys, ICICI Bank, M&M, SBI and UltraTech CementŠ
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Mid-cap / small-cap companies:
AU Small Finance Bank, Bosch, Cummins India, GSPL, SRF, Cholamandalam Investment & Finance, Solara Active Pharma Sciences and Tata Consumer Products Ltd