Equity market rallies can surprise even the most optimists. The BSE Sensex hit 56,000 levels for the first time ever on Wednesday, hitting an intra-day high of 56,118.57 before retreating to close at 55,629.49. Markets have continued to rally despite experts warning of a possible correction, as uncertainty around COVID-19 continues. There are also signs that global central banks would start reversing their easy money policies from next year, which could trigger an outflow of funds from emerging markets like India.
V.K. Vijayakumar, chief investment strategist at Geojit Financial Services, tells THE WEEK a strong growth in corporate earnings and continuous flows from retail investors have driven the markets and the current valuations are hard to justify. Investors may need to be cautious going ahead, he says. Edited excerpts:
What is continuing to drive the equity markets to new highs even as COVID-19 and economic uncertainties exist?
Stock markets have an uncanny ability to surprise. Bull markets have surprised even the incorrigible optimists. The 2003-08 bull market, which took the Sensex from around 3,000 in early 2003 to above 20,000 by 2007-end, is a classic example. In that rally, the Sensex multiplied almost seven-fold, surprising even the market gurus.
The drivers of the bull market can be different at different times. In the ongoing bull market, new retail investors are playing a major role. In the last financial year (FY21), 14.2 million new demat accounts were opened. This trend is continuing. These newbie investors are buying stocks at every dip without much regard to fundamentals like valuation. Strong global markets are providing support to the rally.
There are many concerns regarding growth, COVID-related issues, loss of jobs, and incomes and pains in the MSME (micro, small and medium enterprises) sector. But the corporate sector is doing well, and the stock market represents the corporate sector. In FY21, while India's GDP contracted by 7.3 per cent, corporate sector earnings expanded by 14 per cent. This is a fundamental support to the market. But the current valuations are hard to justify. So, there can be sharp corrections in the market.
At these levels, what should the strategy for an existing investor be?
It makes sense to remain invested in a bull market since markets can surprise on the upside. Investors can remain invested in sectors with good earnings visibility. But investors should be cautious in committing new money at these elevated market levels. However, SIPs should be continued. History tells us that wealth is created through systematic long-term investment.
There is a rising expectation that central banks will start tightening their monetary policies from 2022. What’s your outlook on equity markets and fund flows in this backdrop?
Monetary policies of the leading central banks of the world, particularly the US Federal Reserve, play a crucial role in determining capital flows across the globe; thereby, impacting stock markets hugely. The ultra-loose monetary policy being followed by the leading central banks of the world under the leadership of the Fed has unleashed humongous liquidity into the global financial system. The combined monetary and fiscal stimulus of the developed countries of the world since the outbreak of the pandemic is around $13 trillion. This unprecedented liquidity has played a major role in the ongoing global bull market.
Accommodative monetary policy will be withdrawn when the growth revival shows signs of sustaining. The Fed is likely to start 'tapering' by early 2022 and may indicate policy normalisation after that. Rate hikes are expected only in 2023. But bond yields will start hardening in 2022 itself and money will flow from equity to bonds. This can trigger sharp market corrections.
In the current market scenario, where do you see pockets of opportunity?
IT, metals, construction, pharma, leading financials and pockets of FMCG are doing well, and have good earnings visibility. Construction-related segments like cement, paints and adhesives are well placed, too.
There has been a huge rally in mid and small cap stocks in the past 12 months. Do you think this outperformance will continue or is it time to shift to the more safer large caps?
In an economic up-cycle mid-and small-caps outperform. In the last one-year, the outperformance is excessive. Exuberance of retail investors is partly responsible for this outperformance of the broader market. There is froth in this segment and, therefore, investors have to be cautious. Safety is in large-caps.