Foreign portfolio flows as well as private equity investments are expected to be “healthy” this calendar year as well, but investors would do well not to expect stock market returns in excess of 20 per cent any time soon. This is the key message from Anuj Kapoor, Head of UBS Global Banking, India, the investment banking division of UBS AG, the world’s largest wealth manager. Kapoor also sees a 10 per cent upside to the benchmark Indian equity indices from current levels as “reasonable expectations” for end December 2021. Excerpts:
Do you see a bubble-like phenomenon in Indian equities? Are the benchmarks at bubble peaks or below them?
I don’t think a bubble has been created. While the market has risen quite a bit recently, the optimism is based on expectations and, to date, corporate results for the third quarter (FY21) have been encouraging. Absent major geopolitical developments or economic catastrophe, a major correction is unlikely. In light of the continuing stimulus, I expect flows into India to remain healthy, as India remains in a ‘sweet spot’.
Indian markets have rallied strongly over the last six weeks but many markets globally are at all-time highs. To some extent, this merely reflects expectations of a recovery; often, markets react prematurely and drive ahead of the actual economic recovery.
What kind of FPI flows do you anticipate for India this year? Will it be at the same level as $23 billion that we saw in 2020?
For 2021, I expect FIIs to continue to invest in India but it is difficult to forecast inflows with any precision. Nonetheless, it is not going to be easy to replicate the performance of 2020. Having said that, many commentators believe the $1.9-trillion US stimulus will not be adequate so it could be increased.
In Europe, most economies are fractured and will take years to recover so the scope for further stimulus there is real. Continued central bank support means that the increase in liquidity will have to find a home; and emerging markets provide an attractive yield pick-up relative to that available in the West’s low interest-rate environment. So I would think that we will continue to see FII flows and it would help India immensely if the levels seen in 2020 are replicated.
Where do you see Nifty or Sensex by December 2021? What is the UBS House view?
I see the future trajectory as being positive and that it is reasonable to expect 10 per cent upside from current levels in 2021. In December 2020, the UBS house view, which is generated by our research department and is totally independent, and so is not necessarily my view, was for the Nifty to reach 14,500 by December 2021.
What about the aspect of some unwinding that could happen at the global level? Do you see US Fed taking that move this year based on US economic conditions?
Economic conditions in the US remain weak and the economy will need a fair amount of stimulus to tackle issues like unemployment, slow growth, and a weak currency. While the Federal Reserve’s “liquidity spigot” creates a challenge in terms of ballooning debt for the US Government, I don’t expect it to end in 2021. Interest rates need to remain flexible for a sustained period. In light of this, I do not expect significant unwinding to lead to outflows from India.
Of course, after a significant run-up, there is likely to be some unwinding in the Indian market, due either to profit booking or sensitivity to news such as the border skirmishes with China, but not as a result of overheated markets. The economy is showing early signs of recovery so I see a positive trajectory for India in the medium to long term. As corporate earnings improve, the gap between the markets and real economy should narrow. But investors should not expect stock market returns in excess of 20 per cent any time soon.
Last year, India did pretty well vis-à-vis other emerging markets in terms of FII inflows. So will that story continue this year as well?
The MSCI Emerging Markets Index outperformed global developed markets equities in 2020. I expect that emerging markets economies will benefit further as the vaccine is distributed in developed markets during the first half of 2021 and in emerging markets later in 2021 and 2022; value companies, in particular, are poised to benefit from higher global growth.
India is in a strong position and uniquely placed among the emerging markets. India is already the third-largest destination for nurturing start-ups behind the US and China, and is in the vanguard of technological innovation, which will continue to be an important distinguishing factor determining inbound investment. At the same time, Indian companies have sufficient scale to continue to attract investment not just from the FIIs but also from private equity and venture capital firms, which could exceed $50 billion in 2021.