Room for demand-side measures in budget as actions so far have been supply-centric

Joseph Thomas, Head of Research at Emkay Wealth Management, expects the economy to recover in 2021 but says the market will be closely watching how the government brings back fiscal discipline.

The rolling back of lockdown restrictions had resulted in heightened economic activity. Consumer confidence was coming back and we could look forward to better times in 2021, he said.

In an interview to Moneycontrol’s Sunil Shankar Matkar, Thomas says the banking and financial services are critical for the India and credit growth is at the heart of the sector. Edited excerpts:

Q: After a 15 percent rally in 2020 and 84 percent upside from March lows, can the market give double-digit returns in 2021 as well? Do you expect a major correction—around 10 percent— in the short term?

The indexes have moved up, gaining mainly from the accommodative fiscal and monetary policy, both facilitating an unprecedented liquidity expansion. It is low-interest rates and the easy liquidity that have helped the economy recover to some extent and prompted the markets to move up. These favourable conditions also helped the overall sentiment.

There is a certain level of optimism that has been helping the markets to gather momentum. However, it may be mentioned that while we have seen huge inflows from overseas investors, there has been selling from domestic investors. The markets have clearly moved ahead of the economy and therefore, some amount of profit booking can come in from those who accumulated positions around the time of the crash.

For the economic rebound to be sustainable, we need to see the major macro variables like growth, manufacturing and industrial production and consumer demand returning to robust levels seen before the pandemic.

It is rational to expect some corrections in the market due to certain events or due to lower-than-expected results, or due to similar factors. One factor that is giving strength to the markets is the better-than-expected earnings season we just had, which has further instilled in the market participants confidence to expect much better results in the ensuing periods as economic growth gathers pace and normalcy returns to the economy. Equities, on an average, should give double-digit returns given the risk profile but the expectations need to be moderated against the background of the realities surrounding fixed income returns and the current yields.

Q: Is the Budget 2021 going to be as important after the string of measures announced over the last nine months? What are your expectations from the budget?

The budget, in terms of its content and the message, may not be much different from the earlier budgets. If you take a closer look at the past budgets, it is clear that it is no longer a tool for a one-year financial exercise but an instrument of perspective planning. The budget, as it was in the past, may have some amount of focus on infrastructure development, as it forms the basis for future growth and the release of the actual growth potential.

The sectoral emphasis given in the production-linked incentive (PLI) scheme may be carried forward as it is very much needed in the current economic recovery phase. One of the things which the market would be looking forward to is the way in which the fiscal reorganisation and consolidation are going to be achieved, that is, the path that is envisaged to bring fiscal discipline back again.

Q: Prime Minister Narendra Modi said India received record FDI in 2020 and has set a target of $100 billion for the next two years. What is the FDI amount for 2020? Do you expect more FDI in 2021 and which are the sectors that will benefit the most?

FDI inflows have been close to $50 billion in 2020 and it is a good number compared to the earlier periods but China gets much more than that. So, India should be in a position to attract more FDI and probably less FPIs. China has traditionally encouraged FDI, as FDI is more stable and relatively longer-term amounts of money. A country like India, which is in need of resources for building infrastructure and industries, should ideally target FDIs.

The steps taken by the government in this direction are commendable, like enhanced FDI participation in more areas and higher participation in existing sectors. More than anything else, lot many firms look for ease of doing business as a basic prerequisite for making investments, where the government has been focussing on for possible improvements.

Q: The bank index corrected 2 percent in 2020, though it rallied more than 80 percent from its March lows. Do you expect the sector to be a leader in 2021?

The banking and financial services sector is a critical sector for the domestic economy, therefore, the sector should perform well as economic growth gets accelerated. Credit growth, which is aligned with a pickup in economic activity, is at the heart of the performance of this sector. The market rallied all the way up from the bottom witnessed in March but the banking sector lagged in performance as the bank index stayed at 22,000, and only in the last few weeks, it regained altitude to 30,000. One of the factors that favoured the sector is contradictory to general expectations, the NPA levels remained more or less the same even after the pandemic and the general moratorium on loan repayments. The fact that adequate provisions were made from time to time for bad loans also helped the banking system as a whole to stay immune to any adverse events.

Credit growth is likely to pick up with specific programmes for sectors which require special attention and incentives from the government. The substantial gain in the cost of funds apart from the concessions given in the held to maturity portfolios is likely to bestow on banks certain advantages in the coming days. With a significant share in the market cap in the indexes, the sector is likely to perform well across the sub-segments, with retail business and digitization also adding to business revenues over time, while keeping costs low.

Q: What are the key risks to watch out for in 2021? With the new UK strain that is said to be more infectious, do you think coronavirus is still a major concern?

Threats may arise from three or four factors and these are relevant for the domestic economy as much as for the global economy. First and foremost is the attainment of effective and speedy containment of the pandemic, the second wave of it as well as new strains. If it leads us to another shutdown, it will be extremely disastrous. A second factor that we need to take cognisance of is the likelihood of persistently higher inflation leading to some central banks initiating partial unwinding of the liquidity infused into the economy. This may adversely impact the earnings profile as well as valuations over a period of time, especially if it proves to be the beginning of a period of gradual tightening of policy. This assumes greater importance as oil prices seem to be poised to move up, as well as some other commodity prices. A third risk may be from geopolitical factors, centring around China, Iran, North Korea, the US policies in respect of these as well as the approach to the tariff issues with China in particular.

Q: What is your reading of 2020 and what should the government do in 2021 to bring the economy back on track?

The year 2020 cannot be forgotten that easily due to the pandemic and the impact it had on various aspects of life. At human level, it was devastating as it destroyed millions of jobs and livelihood across the world and on the economic front, no development ever destroyed demand like this one at any time in recent memory.

From a pure market perspective, the rise in the markets that followed the crash in March ultimately proved to be a relief for investors as much of the value that was lost in the fall was more than made good in the rally that followed it. The government and the RBI initiated many measures totalling more than Rs 26 lakh crore, which put sufficient liquidity into the system to support the economy, the businesses, and the markets. The targeted long-term repos were instrumental in offering timely support to the business and industry at a time when it was most needed. The assurance of an accommodative monetary policy till growth revives itself is a major sentiment enhancer for the business and industry, and therefore, the markets. The priority hereon should be measures intended to contain inflation, directed policy measures for sectoral recovery. It is important to ensure that input costs do not rise too much even ahead of an emphatic rise in retail demand and enduring consumer confidence. There is room for demand-side measures in the budget as the actions, so far, have been more supply-centric.

Q: What is your view of global economy for 2021? Do you expect more stimulus measures from Europe and the US?

At some point, we will be able to contain the pandemic and also make available on a commercial basis sufficient quantity of vaccines for a major part of the global population. The containment of the pandemic is the key to bringing back a high velocity of economic activity back into the global economy.

It may be too early to say anything about further stimulus measures in the major economies. The US has a huge stimulus package already unveiled and there could be more coming from the new dispensation. The ECB had two rounds of quantitative easing and liquidity injection. Looks like there may not be any in the immediate future but much would depend on the time taken to come out of the second wave and the new strain.

In India, too, we have had a massive injection of liquidity in the few months after the pandemic broke out. There may not be any major liquidity actions in the near future given the fiscal position at this time. A far as economic recovery is concerned, there is certainly going to be a recovery in growth across continents, based on the first numbers for the last quarter as well as the likely projections for the next two quarters. Consumer confidence is coming back and businesses are opening up. The departure from complete lockdown to partial lockdown has resulted in the generation of a higher level of activity. We can hopefully look forward to better times in 2021.

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