Monthly markets podcast India
India’s financial markets are being buoyed by normal Monsoons and government policies to manage supply bottle necks and tax normalization. This is despite the devastating impact of COVID-19 and inflation risks. In our first India-focused investment podcast, our host Narayan Shroff, Investment Director for Barclays Private Clients India, is joined by Manoj Bajpai, Heads of Equities at Barclays Private Clients India. Listen to the podcast below as they discuss the earnings growth outlook, policymaker’s support, the pandemic and more.
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Narayan Shroff (NS): Hello and welcome everyone to the first monthly podcast for Barclays Private Clients India. I am Narayan Shroff, part of the India Investments team and I will be your host for this podcast.
In the next few minutes, I will share with you our broad economic and market outlook; followed by a short interview with our in-house guest, Manoj Bajpai, who heads equity portfolio management for us at Barclays Private Clients India. I will end with a quick summary of some of the key trends we are observing and our investment strategy.
As another wave of COVID-19 infections sweeps India, the economic outlook rests on the drive to vaccinate people. While the country’s vaccination drive was going well, there are shortage in the doses being reported in some parts of the country.
The central government is aiding the vaccination drive with the widening of eligibility to those over 18 years, approvals for more vaccines, liberalised distribution and pricing to incentivise producers and suppliers, a relaxed policy on vaccine imports and plans to significantly increase vaccine production.
These should help the recovery prospects in the medium term. The recovered and or vaccinated cases are growing at a much faster pace compared to newly reported positive cases in the country.
Although every death is tragic, COVID-19 led death rates continue to remain relatively low in India given its vast population and those more vulnerable are fast being vaccinated. Following vaccination, critical illness requiring hospitalization or resulting in deaths appears to be falling and that should relieve some pressures on the medical infrastructure.
Allowing businesses to reopen with vaccinated staff and/or other strict safety protocols may provide more certainty to businesses. This should ultimately help employment and income visibility and aid growth in demand and consumption.
The focus on vaccination also increases the hope that this may be “the beginning of an end”.
While the second quarter may experience some contraction in growth, the second half of the year is likely to see a sharp recovery in business and market sentiment.
Full normalcy looks sometime away in India as the best case scenarios suggest that 40-50% of the population will be vaccinated by the end of this year. Therefore, safety and precaution measures are likely to be in place for some time; travel restrictions, especially international travel, may still be needed; and fear of variations/mutations of virus and risk of another wave may keep demand recovery below full potential.
India’s fiscal and monetary policy support, with “whatever it takes” vaccination stance, should continue longer than expected. Growth-supportive guidance from policymakers are already aligned.
Last week, the RBI announced additional liquidity support measures, including INR500bn of up to 3-year term liquidity facility to scale up the provision of healthcare services, a INR100bn special liquidity window for small finance banks, and gave exemptions to banks to increase lending to medium-, small- and micro-sized enterprises.
Financial markets may look through the inflation risks for now, aided by normal Monsoons and the government’s policies to manage any supply-side bottlenecks or through tax normalization, such as on oil.
In the near term, markets may fear supply chain pressures, including labour migration; a slowdown in inventory build in non-essentials; pressures on lenders from any potential interest moratoriums and stress on small and medium enterprises (SME’s). Hence, banks and NBFCs may come under pressure.
However, investors may start looking through this phase sooner rather than later, especially if helped by extra support announcements from policymakers.
Despite another wave of infections in India, with a sharper pent-up demand-led recovery likely, valuation corrections seem to be attracting flows back.
Businesses and investors hoping to see the recovery sooner rather than later and fearing missing out again on any sharp bounce back should keep their risk allocations and investment plans intact.
It’s been almost a couple of months since the severity of this second wave in the country picked up. How has this period been so far for your portfolios?
Manoj Bajpai (MB): Yes Narayan, it has been a challenging time for everyone including investment managers like us due to heightened volatility and uncertainty coming back in terms of economic recovery due to lockdowns in different formats across the country. However, our portfolio positioning is well balanced and has helped us navigate this period with better outcome.
Talking in terms of the performance of our flagship BW Dynamic Opportunity strategy, for the month of April, we outperformed the benchmark by about 315 bps while benchmark BSE 500 closed almost flat, up by 45 basis point but witnessed a lot of intra-month volatility. Our Portfolios has a good blend of defensives, growth and cyclicals, which is coming handy in these uncertain times.
NS: How’s the earnings season been so far and what have you observed in your bottom-up study?
MB: The current earnings season has panned out well till now and expected to be a strong one with major growth coming from metals and banks. Overall, Quarter-4 earnings are expected to be robust, representing a continuation of a sequential recovery driven by a gradual economic re-opening with robust demand reflecting a strong pick-up in cyclical sectors.
The positive earnings momentum of the last two quarters is likely to sustain in these quarterly earnings as well, led by sharp demand revival across segments. This is further supported by the lower base of the last year, amplifying the effect of earnings growth.
Margins for the quarter are likely to be impacted due to rising input costs. However, it is likely to be offset by stronger volumes and realizations. Cyclical sectors such as Metals and Cement will post strong results led by stronger demand and uptrend in realizations.
Management assessment on the key trends and demand drivers will be crucial, considering the recent Covid-19 surge in certain parts of the country, which have led to new local lockdowns.
Metals, Specialty Chemicals and discretionary sectors are likely to post good quarterly operating performance while corporate commentaries on the margins will be critical due to the recent run-up in commodity prices.
NS: What are your Top-2 and Bottom-2 sectors or themes and why?
MB: We think the sectors which look good from a medium term earnings growth perspective are Metals and IT services.
Metals we like due to strong cyclical uptrend globally, which will help prices sustaining at higher levels as new supplies are not visible in near term.
Especially for steel, also analysis of results and commentaries from global steel majors indicates that good times for steel makers is expected to persist. Key points to note here is that the EBITDA margins are at multi-year high levels. Demand for steel in Quarter-2 of calendar year 2021 looks strong. Also the contracts with end-customers are being negotiated at higher prices.
Taking cues from the performance of global companies, we believe Indian steel producers are also positioned nicely so have taken over weight stance in our portfolio couple of months back.
Coming to IT services, we think there will be strong tailwind in their earnings over coming 3-4 years period, mainly from increased digital spend across the industries.
The sectors which are not preferred at this point are Auto makers as we expect non-discretionary spend to remain low due to covid related stress and Energy, where no earnings upgrade is visible in the medium term.
NS: What are the savvy equity investors doing? How much of their equity allocations are they invested into the markets?
MB: The investors and family offices we are speaking to on a regular basis are still cautious on the equity markets in the short term, given the uncertainty around 2nd wave in India and are waiting for some clarity to emerge. However, they are quite positive on medium to long term.
Coming to the allocations, the positions are in Line with their asset allocation models and I have not seen many cases of under allocation into equities, which is quite encouraging thing. For Tactical allocations, timing the market is difficult as the corrections are shallow and short lived. However, buying specific sectors and stocks is still making them curious as the returns profile is quite different for different sectors and stocks within the same time frame.
NB: You heard from Manoj on Indian Equities. In the Indian bond markets, we see GDP growth for fiscal year 21-22 likely to be around 10%, with some downside risks if the current restrictions extend beyond the current quarter.
Inflation should remain within RBI’s acceptable band of 2% to 6% in the coming months.
Also, for now, systemic liquidity is expected to remain ample with the central bank redeploying liquidity towards more productive opportunities at the longer end of the yield curve.
We see demand supply dynamics for bonds remaining on an even keel. And, the RBI unlikely to significantly change monetary policy stance until a durable and sustainable recovery is underway,
We find merit in the up to 5 year duration segment and feel that the high credit spreads should narrow. Judiciously, we continue to add issuers in sectors which may gain from economic revival.
On the overall asset allocation, As the effects of and uncertainty around the pandemic linger and as the economy revives, Indian assets are likely to experience periods of elevated volatility and sharp sector rotation. As such, allocating assets with appropriate diversification remains key and allocations to global equities, gold and private assets (both debt and equity) may be worth considering.
With this, we come to an end of our podcast. Thank You for joining us today. Stay safe and healthy.
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