The recent spate of reforms from the govt on the farm sector, as well as labour reforms also seem to have given confidence to the foreign investors on India’s long-term growth potential.
Edited excerpts:
Q) What a year it has been for Indian markets. An absolute roller coaster ride for investors amid the outbreak of COVID-19. But, things are looking much stable from markets and economic point of view which is a positive sign. How do you see the markets in 2021?
A) If COVID-19 has taught one thing, it is that the markets are unpredictable. In fact, markets have been increasingly unpredictable even before the pandemic, especially in the short-term.
Surprising, as it may seem to many, earnings of specific companies over the long run are far more predictable than stock prices in the short run.
With that caveat, we can still attempt to understand the factors that are driving the market, still may not exhaustive though.
Liquidity from central banks, vaccine availability, and hence expectations of a return of normal economic activity are key factors currently and from the looks of it, they seem to remain being going into 2021.
However, the recent rally suggests that the market is already pricing in these and now would look for the same to reflect in corporate earnings. Besides the return to normalcy in economic activity, low-interest rates, low crude prices and effect of the stimulus, and some structural reforms over the recent years should support a strong economic cycle over the next 3-5yrs.
This should augur well for companies that have managed to come out stronger out of the crisis, thanks to their balance sheet strengths and competitive advantages and therefore should see a meaningful pick up in earnings growth and therefore support healthy returns over this cycle.
Q) FIIs have bought aggressively in Indian markets especially in November. So, what seems to be driving the optimism?
A) Given low-interest rates across the developed world, there seems to be a move to chase risk assets, especially emerging markets.
Emerging markets have lagged the developed markets for some time and there seems to be a view building that the time has come for EM’s to catch up. That is driving a lot of flows into EM’s.
Within EM’s, India has lagged, partly because of the rising Covid cases until recently. Now that the overall numbers seem to be in control suggesting a return to normalcy of economic activity, India is getting a disproportionate share of incremental flows.
The recent spate of reforms from the govt on the farm sector, as well as labour reforms also seem to have given confidence to the foreign investors on India’s long-term growth potential.