‘Equity markets look stretched, but not in bubble zone,’ says Kotak Securities chief Jaideep Hansraj

K RSrivats New Delhi | Updated on January 20, 2021

Jaideep Hansraj, MD & CEO, Kotak Securities

‘Any fall in future should be viewed as correction as we do not expect any major crash in the market when economy and corporate earnings are on a recovery mode’

Indian equity markets have begun 2021 on a bullish note with benchmark indices scaling newer highs on the back of strong global FPI flows. The unprecedented rebound in equities post the Covid-19 driven sell-off in April last year is now being fuelled by expectations of Union Budget with strong doses of reforms.

BusinessLine caught up with Kotak Group veteran Jaideep Hansraj, MD & CEO, Kotak Securities, to get his views on the markets. Excerpts:

With the BSE Sensex just a whisker away from 50k, is there a bubble in the making in the Indian market? Should investors stay away from fresh exposures?

Markets look stretched in terms of valuations as they are trading at peak valuations, but we cannot call it a bubble because of its relative positioning with other asset classes. The uncertainty factor could fade going ahead if vaccines prove effective which may make gold look unattractive to investors. Hence, most of the global liquidity could continue to flow into equities. The MSCI Emerging market has just closed above its pre-global financial crisis high of 2007, which, if sustained could take it into a new zone. We are hearing a big stimulus is likely to come from US government, which along with the loose monetary policy of the Fed, ECB and BoJ could be the main driving force for more flows into emerging markets. Investors can look to either stagger their investments in a systematic SIP kind of way or wait for corrections to enter the market. Any fall in future should be viewed as a correction as we do not expect any major crash in the market when economy and corporate earnings are on a recovery mode.

Also read: Bad bank should have been set up 3-4 years back, not now: Kotak Securities report

Your outlook for 2021 Nifty 50 prediction is 13,500 by end December, lower than the current index. Do you expect the market to be bearish in the next 11 months and why?

We expect markets to behave differently in the first half and second half of calendar 2021 (CY21). We can expect Nifty to go to ~15,000 sometime in first quarter of CY21 led by healthy FII flows, stronger Q3 earnings season and roll-out of vaccination program. Post Budget and Q4 result season we expect markets to go into consolidation phase and witness time correction. The sharp run-up in global commodity prices (including Brent crude) when clubbed with large cash infusion by developed markets should lead to spike in inflation. Higher inflation could lead to rise in bond yields sometime in the second half of CY21 which could lead to change in stance by central banks. We expect moderation in monetary policies in second half of CY201, which will start the mean reversion process of equity valuations towards their 10- to 15-year averages. Based on these thesis we have used the previous 15-year peak of 19 times forward PE multiple to value the Nifty 50 to derive at our CY21 end target. We expect Nifty 50 to end CY21 somewhere ~13,500 and BSE Sensex to end at ~46,000. Since markets are trading in new zone, we need to reassess our year-end targets at regular intervals. Since valuations are stretched and trading at peak levels any change in Nifty-50 target could be a function of change in earnings estimates. If earnings forecasts go up by ~5-7 per cent then our target could move up anywhere between 14,000 and 14,500 or else we would stick with our target.

What is your take on the FPI flows into India and emerging markets?

In calendar year (CY) 2020, India was the only outlier getting $23 billion of FPI inflows as most other emerging markets saw outflows. Post US elections, we have seen FPI flows moving towards emerging markets. For instance, between November and December 2020, we received $16.5 bn or ~70 of CY20 FPI flows. The MSCI India Index at present trades at 48 per cent premium over MSCI Emerging Market Index compared to the 10-year average premium of 41 per cent. The MSCI Emerging Market Index has broken its previous peak and if it sustains above this for a few more weeks then we can expect another wave of heavy flows into emerging markets. Unlike CY20, this year the flows into emerging markets could be spread across various countries. To this extent, India might see moderated FPI flows. Nonetheless, we still expect FPI flows in India to range between $15 bn and $20 bn in CY21.

Which are the sectors and stocks one should be investing in the current market environment?

We have seen enough churn and rotation in the last six months. Turn-by-turn most sectors have seen upmove and re-rating which leaves very little room for any major re-rating in most sectors. Out of the three defensive sectors, IT and pharmaceutical sectors have seen major outperformance and re-rating in the last one year. So they may go in for time and price correction in this calendar year. FY22 will be a year of recovery, both for the economy and for corporate profits. Hence, it is ideal to play the recovery theme and focus more on economy-driven sectors. It is logical to bet on the worst performing sectors of CY20, that is banking, oil & gas, utilities, capital goods, real estate, metals, telecom and FMCG.

What are the risks you envisage for Indian and global markets?

Risks emanating globally are: 1) rising commodity prices which can fuel higher inflation which in turn and can lead to higher bond yields, 2) any side-effects or delay in roll-out of vaccination could derail the recovery anticipated in global GDP, 3) after the Blue wave in the US, there is risk of higher corporate tax rate and also higher capital gains tax on the rich which could impact the US markets and in turn, effect the global markets, 4) any negative outcome on the various lawsuits filed against big tech companies can impact markets as the CY20 rally was fuelled by them. Risks emanating locally are: 1) rise in Brent crude price to $70-80/bbl will effect India’s economy, 2) any moderation or reversal in FII flows due to rise in global bond yields could lead to some moderation or de-rating of Indian equities, 3) any second wave of Covid-19 in India, which is not visible as of now, could impact our GDP growth and corporate earnings estimates.

Published on January 20, 2021

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