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If the US markets see a sell-off then it is very likely that even Indian markets would correct as the correlation with the US markets has increased significantly in recent times.
The current correlation of India equity markets with the US' S&P 500 is between 70-80 percent and this correlation will hold if US markets sell-off, Naveen Kulkarni, Chief Investment Officer, Axis Securities, said in an interview with Moneycontrol’s Kshitij Anand.
edited excerpts:
Q) FM meet with bankers suggest that govt also wants the economic activity to pick up as soon as possible. Do you also see another stimulus package?A) A stimulus is needed for the economy, but the ability of the government to provide it considering the fiscal situation will be a challenge.
Indirect tax collections are trending below the baseline and direct tax collections could have been significantly impacted. Interest rates continue to remain low which is positive but a solid fiscal stimulus package seems unlikely.
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The government could look at some key sectors like two-wheelers, SMEs and MSMEs and provide a package for these sectors. However, a broad-based package across sectors seems unlikely at this juncture.
Q) The way markets are reacting to bad news it does seem like that the worst is over. Your take?A) It is difficult to say that the worst is over because COVID-19 cases continue to rise and as more people socialise, the cases will rise and so the pressure on the medical facilities.
There is also tremendous fatigue of lockdown and many areas we see caution has been thrown to winds. So, the challenges of the COVID pandemic are far from over.
Q) The biggest driver of the equity rally is US markets. Some experts on D-Street feel that there could be some correction post US elections, and the same could flow down to emerging markets like India. What are your views?A) The US equity markets are very expensive and the S&P 500 is trading at 3 standard deviations above the long-term mean.
If the US markets see a sell-off then it is very likely that even Indian markets would correct as the correlation with the US markets has increased significantly in recent times.
The current correlation of India equity markets with the S&P 500 is between 70-80 percent and this correlation will hold if US markets sell-off.
Q) FIIs seem to be going all-in for Indian markets which is a positive sign for now. Do you think it is the near-zero interest rates across the globe, or we are genuinely looking attractive?A) Dollar depreciation and a significant amount of liquidity have an impact on flows. However, it will be difficult to judge when the equity flows will dry up. This will depend on the economic revival. If economies do not revive then the liquidity will dry up significantly.
However, the interest rates will continue to trend at a low level for a long time, as per the new Federal Reserve inflation targeting framework, and in that context, emerging markets that are cheaper than the S&P 500 or Nasdaq are more attractive.
Q) There is a lot of chatter around the Dollar index which is likely to go down, how will that impact emerging markets like India? If Trump wins the election do you see a strong dollar and how that impacts equity markets?A) The dollar index going down will have an impact on FII inflows and commodity prices across the world. Both will have a positive impact on emerging markets.
However, it is difficult to gauge the impact on US dollar of one candidate winning the election versus the other at this point in time.Q) What is your take on the telecom sector and metals?
A) The metal sector is doing very well as prices are up and capacity utilisation is picking up. For the telecom sector, more price hikes are needed for the sector to make reasonable returns on the invested capital. The current return on capital in the sector is abysmal and needs to improve meaningfully.
Q) What is your call on the pharma? Do you think that the rally has already played out – Nifty Pharma is up 40% in 2020? What are your top bets in the pharma space?
A) Pharma has turned around structurally after a prolonged period of underperformance. On a P/B and RoE matrix, the sector is seeing stability and improvement. The Pharma sector will continue to deliver returns in the forthcoming quarters.
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