India was a laggard last year, this Budget has changed growth trajectory: Punita Kumar Sinha – The Economic Times

Clipped from: was a laggard last year, this Budget has changed growth trajectory: Punita Kumar SinhaET NowLast Updated: Feb 09, 2021, 07:20 PM ISTSynopsis

There could be some sectoral shifts. Within financials, there is still a lot of opportunity.

multicap portfolio would be a good bet now because not only mid and smallcaps but there will be some good large cap companies as well, says Punita Kumar Sinha, CIO, InCred AMC

You said that you expected the Budget to be very growth oriented and it seems like the finance minister did deliver on that front. How have you read into a lot of the announcements made and the thrust on infrastructure?
It has been great, particularly because instead of focussing only on the demand side, we have focussed on the supply side. India is supply constrained and to give incentives to manufacturing, infrastructure, agriculture anything that is going to be output oriented is good in the long term also because that will lead to better inflation numbers.

Of course, anytime there is a big stimulus as we have seen in this Budget, there is always concern of inflation longer term and then of course rising interest rates. But by giving a more supply side stimulus instead of just a demand side one, the inflation is managed a little bit better. So it has been growth oriented and it had the right thrust in the areas that we most need right now.

How are you looking at the gush of liquidity that is coming into our markets? Do you believe that this robust liquidity situation is here to stay?
For the moment yes because the US yields have fallen in the last 20 years from about 6% to near zero and in India, it has gone down from about 10 to about 6%. So the US yields have dropped much more sharply. There is no real place for savings to be invested other than real estate, equity markets and things like crypto currencies where you can get some returns. Heading into the US election, I was quite sure that if President Biden were to form the government, he will have a much better trade policy with emerging markets and developing countries as well as immigration policies which will bode well for emerging markets and emerging markets valuations.

A lot of foreign money has come into India for a number of reasons; one is the valuation disparity in some cases between emerging markets and the US. We are seeing better growth prospects from countries like India after the Budget and this liquidity has to find places where they can get returns.

At the moment, the growth estimates for India are higher than we are seeing in most other countries as per IMF. Again, I am not saying that they will necessarily be realised but the growth numbers for India are very strong. The growth numbers in the US are also good but the valuations in the US markets are not as attractive as here and it is all about liquidity.

The market cap to GDP ratio in the US is at an almost all-time high and the numbers that we have seen have been driven largely by the top 10 stocks there. If you look deeper, there is value in some areas there too but there is much more growth potential, much more value in emerging markets. India was a laggard last year and this Budget only changes that growth trajectory. And also the Covid cases in India have come down. It is to be seen whether another phase of rising Covid happens or not, but at the moment, the economy is not under lockdown. In some of the developed markets, economies are under lockdowns and there is still concern regarding when those economies can be fully opened.

As an investor, how should you be mapping the markets? Do you need to tactically align your portfolios now and move a little bit out of large caps and deploy higher chunks to small and midcaps? Or would it be more of the same in the near future as well?
In December, right around the US elections, I was saying that if President Biden forms the government then EMs will do well and smaller and midcaps will do better than large caps and that has played out to some extent. Now we are in a risk-on trade and at the moment I would say there is still value in small and midcaps selectively because some companies have still not really performed over the last five years. Their trajectory is still below their previous highs. If they are in the right sector where the stimulus has been given in the Budget, then you would potentially see some rerating of those companies.

I think a multicap portfolio would be a good bet because I would not be only in mid and small but there will be some good large cap companies as well. Also, there could be a shift. We have already seen some rebound in PSU space. There could be some sectoral shifts also. Within financials, there is still a lot of opportunity.

There is still opportunity in anything capex related. One has to be a stock picker right now because easy money has been made from March lows last year to now. But there is plenty of liquidity and the domestic investors have not yet come back in a big way. So that extra liquidity can still come into the market.

The only thing of course is that one does not know about geopolitics, one does not know whether oil will keep going up and longer term, high fiscal deficits lead to higher interest rates. Those are not going to bode well for equity markets longer term but at the moment, it seems the party is still on.

The March recovery began with IT and pharma, but it is spread into other areas like home improvement, the paint segment and now we are seeing a move across the auto segment as well specialty chemicals. Where within mid and small caps, should one hunt?
Among auto and auto components, there are a lot of midcaps that one can research and find. Anything capex related which includes anything in the infrastructure space as well. These have been big underperformers for a long time. One can find opportunities even in financials. There are not just the large private sector banks but a lot of other financial companies as well as NBFCs. One can find opportunities even in the banking space. There are opportunities even in healthcare and pharma. So, I would say there are opportunities across sectors.

How have you read into the earnings momentum for IT and do you see the long term story playing out?
The IT industry has done really well in this environment because more and more companies have shifted to using technology globally and the Indian IT services companies have benefited and there have been large deal wins. So the momentum is there. The credibility of the Indian companies in the global markets is there, they will not obviously benefit further from the domestic Indian recovery the way the Indian cyclical and the Indian oriented domestic stories will do. So they would not have that same kind of kicker that we are seeing from the Budget.

Of course, these are also secular growth stories and so are kind of core holdings. There will be periods when they may outperform like we have seen of late or they might even underperform for short periods of time but they are secular stories given the space that they are in and as more as more innovation is happening in these companies, they are going to get into more spaces that are going to be disruptive technologies in the future. So I would still allocate to IT but they will not benefit from in terms of the cyclical recovery in the Indian economy.

Speaking of that overall cyclical recovery, are we likely to see some sort of a shift when it comes to the rural thrust?
Yes, actually that has been playing out over since the lockdown. Anything rural has done better than the urban partly because the Covid severity was not as obvious there and also because you know people are not living as close together in the farms and those areas and so business activity was quite normal. Also some of the incentives in the Budget to the agri sector will also help.

The rural economy has been doing quite well. The latest crop sowing patterns have been very encouraging. In the urban areas, unemployment has been a bit of a concern. While a lot of migrant labour has come back to urban areas there are still a lot of people in the rural areas that have permanently shifted and companies in the agri sector whether it is seeds or pesticides or chemicals — all are also seeing demand growth.

Auto companies are a;so seeing some demand in the rural area and rural consumption will keep growing. Housing might also do well in rural areas. At the moment, things are chugging along well. Coming from a low base, there is a huge uptick there. It is a steady growth story.

On the basis of valuations and pure fundamentals how are you looking at the prospects for the engineering and capital goods sector?
As I said, anything capex related will definitely benefit. For so many years, the private sector has not really invested in capex. The government is now going to substitute that and is going to invest in infrastructure, agriculture and growth. Once that starts, the private sector will also benefit and eventually they will start adding capacity.

One of the spaces is cement. It has done very well but anything related to infrastructure growth build out will benefit. So engineering services should do very well because when you have so much infrastructure spend, then you need engineering services. Also any companies that are supplying towards this capex are also going to benefit. There have been a lot of companies that have had very depressed earnings in the last few years. That should improve because demand will come from the government infrastructure spend and eventually the private sector that has capacity to keep up with that kind of demand, will start benefiting as well. So yes, I am optimistic on this space.

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