Stocks

‘20% return for the indices is not difficult in 2021’

KS Badri Narayanan Chennai | Updated on January 01, 2021 Published on December 31, 2020

Raamdeo Agrawal

A key lesson learnt in the eventful year 2020 is that investors should have high conviction and belief in the market, stay long-term and expect moderate return, says Raamdeo Agrawal of Motilal Oswal Group

Stock market veteran Raamdeo Agrawal, co-founder and Chairman of Motilal Oswal Group, shared with BusinessLine his thoughts on the important lessons learnt in 2020, and his perspective on key topics including the Budget and work-from-home trading. Excerpts:

The volatile 2020 has come to an end. What important lessons did it give investors?

Yes, 2020 has been an eventful year in the sense that the stock market began on a strong note to reach an all-time high in January but plunged almost 50 per cent by March due to the outbreak of the Covid-19 pandemic. The shutdown also affected India Inc’s performance in the first two quarters. But after hitting a low in March, the markets were in a recovery mode till August, and gained momentum thereafter on the initiatives of the governments and central bankers across the globe to revive the economy. In the last couple of months, global liquidity entered India through foreign portfolio investors and lifted the market to a new peak.

Despite the current peak level, if one looks at the whole year, the returns given by the Sensex and the Nifty is around 15 per cent only.

So, the important lesson from 2020 is one should not try to time the market. Investors should have high conviction and belief in the market, stay long-term and expect moderate returns.

So, how do you think 2021 will pan out?

I think 2021 will be exciting because of liberal fiscal and monetary policies and general recovery in the economy. The government will also work hard to bring the economy back to normal. My sense is that this year will see a full recovery in the economy. The prediction is that corporate earnings will recover 25-35 per cent.

In that situation, I don’t think 20 per cent return for the benchmark index is very difficult. I would put the year 2021 as ‘returns of 15-20 per cent’.

What are your expectations from the Budget, particularly from the market perspective?

The market is looking for reinvestments in the economy. How much the government is planning to reinvest in infrastructure is important. As the government is determined to build the economy, the expectation is that it will invest 3-5 per cent of the GDP in capex instead of 1-2 per cent. And the key question is how much it actually spends — instead of just planning — for 2021-22. If last year was about ₹2.5-lakh crore, the market would like to see multiples of that this year. That will actually set the ball rolling.

However, how it is going to be funded is a key factor. If the government says it is planning to spend ₹5-7-lakh crore and the divestment or tax collections are not matching then the capex plan will suffer.

So, the Budget has to make sure that there is enough funding for the actual spending. If that happens, there will be great demand for cement, steel etc. and it will create more jobs too. This will also trigger durable and consumer demand in rural India.

Once this happens, corporate spending will also pick up and that will bode well for the overall economic recovery.

The past few months saw the entry of retail investors in large numbers. One of the reasons for this is the WFH culture. Do you see any impact on the volumes once normalcy returns and people start working from office?

My sense is that once work-from-office resumes, the pace of influx of new traders or investors will definitely slow down. But those who already came in, we generally see, will continue. They are already in the system and will remain so till they burn out. Once they incur losses, they will exit their portfolios and switch off the terminal.

However, if the market picks up, with say a rise of 20 per cent in the next 12 months, you cannot stop them, whether they work from home or office, as they would have tasted blood. But, if the market peaks and then corrects sharply, it will drive them out.

Motilal Oswal comes out with a study on consistent performers and multi-baggers every year. How easy is it to identify potential consistent performers to ride on the next 25 years?

One should not bother too much about the future. Bothering about the future is necessary but the future is also written in the past to some extent. But nobody listens to the past. If a company is doing well in the last 2-5 years and there is a very high return on equity, high profitability, high cash flows and the management commitment is good, then there is no reason to believe that these companies will not deliver in the next five years. That is my experience.

And, nobody on earth can figure things out for the next 25 years. And, the bad companies will definitely not survive the next 25 years. They will either become bankrupt or shut down.

Another thing I have seen is consumer-facing companies are far better for long-term investments. Two-thirds of companies that are in our listed are consumer-facing.

A lot of capital-intensive physical companies will not survive. They are good for just 2-4 years, when the trend is up and then slump if there is a slowdown. They will not get up again and we will see a new set of physical companies coming up.

So, we need secular businesses; we need well-performing businesses. And, if you want multi-baggers, you need to start with a company of reasonable size, say a small-size of around ₹5,000 crore.

But some investors prefer to go for stocks that become multi-baggers in the short term…What’s your view on that?

Never go for such a strategy. My advice is invest in stocks and expect a reasonable return of 15-20 per cent per annum.

But when you buy with a margin of safety, a lot of things are happening in the world. See the government policies of PLI (production-linked incentive). If the company you picked is positively impacted by PLI, then it will grow even 50 per cent instead of your own expectation of 10-15 per cent.

So, one should buy the stock with reasonable expectations and margin of safety. Don’t be greedy.

Now, a lot of investors are interested in overseas markets. What is your advice to them?

Any investment outside India should be through the index only because our knowledge of a foreign company is very limited unless it is Microsoft or Facebook. However, it is better to buy through index funds. It will be much easier, available in local currency and make very good returns.

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Published on December 31, 2020
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