The BSE Sensex plunged more than 3 per cent on Monday, while the NSE Nifty 50 was down over 3.5 per cent as a continued surge in COVID-19 cases worried investors. Several states have already imposed some restrictions like night curfews to battle the second wave of coronavirus. The concern is that such restrictions across states and a likely lockdown in Maharashtra could impact India’s fledgeling economic recovery.
Lav Chaturvedi, the ED and CEO of Reliance Securities, expects the equity markets to remain volatile for some time, although he is not expecting a huge correction. Excerpts from an interview:
Q. There is increasing uncertainty around the second wave of COVID-19. How much are you worried?
This is really a matter of concern as a prolonged mobility restriction, income uncertainties and possibility of exodus of large migrant workers can potentially hurt the timelines and sustainability of ongoing recovery in corporate earnings.
Q. What is the kind of impact you expect on the economy due to the recent surge in COVID cases and the restrictions that various states have imposed?
One of the most difficult thing to do during these times is to predict. However, given experience in 2020 and government’s effort to ramp-up vaccination process, this outbreak can be controlled without a large-scale of economic damage, in our view. This is unfortunate that Maharashtra, which contributes over 13 per cent of country’s GDP and around 20 per cent of domestic industrial output, has witnessed sharp upsurge in new cases and accounts for 30-40 per cent of total daily new cases in the country. Hence, more economic restrictions in the state cannot be ruled out, which may further weigh on both recovery and sentiment.
Q. In this backdrop, what's your outlook on equity markets? If the lockdowns were to extend and restrictions become more severe, do you feel the markets will see a sharp correction?
While ongoing uncertainties about businesses and corporate earnings are expected to weigh on investors’ sentiments in the near-term, we believe outlook of equities remains intact given government’s commitment to drive economic momentum by way of the sharp 26 per cent increase in budgeted capital expenditures target for FY22.
Further, RBI also in its latest policy meet indicated its commitment to help sustaining recent rebound in economic momentum by ensuring low cost of capital, despite hardening global bond yields and inflationary concerns. Hence, we do not expect any large correction in the market. In our view, markets would be volatile and any correction in the market could be used as an opportunity of bargain trading in quality stocks having strong earnings potential.
The general trend for the market does not look to be inspiring in the near term as apprehensions about spike in COVID-19 cases and resultant restrictions will continue to make investors jittery. However, this is expected to be a near term phenomenon and mid-term outlook for 2021 and beyond continues to look healthy due to higher capital expenditures programme of government and pick up in industrial investment cycle.
Q. Lakhs of people took to equity investing in 2020 and they saw the market going only up. Now amid the volatility what would be your advice for retail investors right now?
This will be an acid test of patience of new millennial investors who opted for direct investment in equities in recent years. Our advice to new investors would be to demonstrate discipline and have patience on equities as outlook of domestic equities remains intact. BSE 500 is expected to see sharp rebound in earnings mainly on multiple tailwinds, which should continue to support premium valuations of markets.
Q. Sectors like aviation, hospitality, multiplex etc were hard hit by the pandemic. But the stocks of these companies bounced back in the anticipation that an economic rebound will aid recovery. Now, they have been hit again. How will you play these sectors?
These sectors are expected to remain volatile until second wave of COVID-19 is controlled. Given the ambiguities about normalisation of their businesses even after second wave of COVID-19, these sectors are expected to underperform the broader market in the near to medium term.
Q. Which are the sectors that you would prefer right now and why?
We advise investors to invest in sectors, which are considered to be beneficiaries of revival in capex and investment cycle in the country. We believe building materials, infrastructure, industrials & capital goods, financials and select auto stocks are expected to outperform broader indices in FY22.
Q. Indian markets saw a strong recovery in 2020-21 on the back of huge inflows from FIIs. With bond yields rising and US economy expected to gain traction later this year, is there a risk of the tide reversing, at least to some extent?
FPIs flow into Indian equites is expected to remain favourable despite some volatility seen in recent period owing to: a) soft monetary policy stance of Federal Reserve is expected to persist as US economy still needs support to sustain economic momentum. Therefore, any reversal in policy rates and monthly bond buying programme does not look to be on the card at least in 2021 and any possibility of taper tantrum situation is still far away, and b) India continues to offer superior growth visibility compared to many developing and developed nations.