Their View. India poised at an inflection point

After a period of turbulence over the past nine months, the overall macroeconomic backdrop is becoming conducive for equity markets. Globally, there are few key drivers that will chart the direction of markets going forward, viz US elections, monetary and fiscal stimulus, resurgence in Covid spread, vaccine approval and economic recovery.

US elections have resulted in a gridlock scenario with a Democrat President, but a Republican Senate.

In this scenario, the fiscal stimulus is expected to be $1 trillion or less. This should lead to a fall in treasury yields and a depreciation of the US dollar.

In addition, various measures such as corporate tax rate hikes, drug price controls and increased regulation on sectors such as energy and technology are unlikely to be passed and the US-China trade tensions should also moderate.

Considering a smaller fiscal stimulus, the US Federal Reserve is expected to do the heavy-lifting and continue with its accommodative stance till the end of 2024 and maintain high liquidity in the system, which is supportive for risk assets.

A resurgence in the virus is being seen in Europe as well as in the US, leading to a second lockdown in some countries. However, concerns regarding the virus are lower now than a few months ago since protocols to handle virus cases are well-known and vaccines should be widely available soon.

While we have consistently been positive on the global recovery, the pace of recovery has surprised most market participants as well as policy makers. We continue to witness upgrades on growth estimates, although the current global activity indicators are beginning to see a natural moderation after a sharp recovery in the past few months.

India story

India also seems to be at an inflection point now. Growth indicators are also inching up as evidenced by various high frequency data points such as GST collections, rail freight, e-way bill generation, electricity and fuel consumption and sales of cars and two-wheelers.

Overall activity level is touching close to 95-100 per cent of pre-Covid levels.On the Covid front, active cases are about a quarter lower than the peak. Daily new cases and death rates is showing a steady decline. It is likely that we will start seeing upgrades to India’s GDP growth estimates.

Q2FY21 earnings season is also providing an encouraging picture.

Earnings have risen by 24 per cent y-o-y for more than 35 Nifty 50 companies which have reported results, and almost three-fourths of them have seen an upgrade in earnings estimates.

Sectors such as cement, IT, banking, consumer durables, pharma and auto have beaten expectations.

Earnings surprise have been primarily driven by sharp margin improvement aided by better-than-expected recovery, continued cost-optimisation initiatives,better-than-expected pricing power/realisation, and lower-than-expected provisioning costs in the BFSI sector.

Some of these gains will ease as the businesses normalise, but most companies expect about quarter of the gains to be sustainable.

Hence, expect margins to be 100-150 bps higher on an average going into next year.

Corporate commentaries have also improved, with consumer staples and consumer discretionary companies guiding for improved demand in the festival season, IT companies highlighting robust and growing deal pipelines, and banking and financials (BFSI) demonstrating improved collection efficiency/disbursement trends and guiding for controlled restructuring ahead.

Given this positive backdrop, we can expect earnings upgrades going forward. It is noteworthy that we are finally getting into an earnings upgrade cycle after 4-5 years of depressed earnings growth.

Growth recovery

An economic recovery bodes well for cyclicals. BFSI and real-estate sectors should benefit. Overall collection efficiency reported by most banks has improved to 94-95 per cent. Although credit growth has been weak thus far at 5.7 per cent y-o-y due to the weakness in the economy, loan disbursements are expected to pick up going forward. Further, large private banks have fortified balance sheets after recent capital raisings, and their credit costs are expected to see material moderation in FY22. Overall, earnings for this sector can be expected to turnaround and normalise over the next twelve months.

In the case of real estate, affordability has improved, with property prices having corrected due to the pandemic. Mortgage/home loan rates below 7 per cent are attractive.

Cement demand, which is a good proxy for the realtysector, has also picked up, indicating a recovery.

We are seeing good earnings growth and entering into an earnings upgrade cycle after a long time, with growth far exceeding the nominal GDP growth rate. While the markets have already rallied to new alltime highs, the positive outlook across most sectors and strong earnings momentum can continue to drive markets higher, with minor corrections on the way.

The writer is Co-CIO, Aditya Birla Sun Life AMC

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