Global equities offer generous risk premium than others: Unmesh Kulkarni

FPI flows into Indian equities are likely to stay positive, says Kulkarni

It has been a one-way street for the markets over the past few sessions. UNMESH KULKARNI, managing director and senior advisor, Julius Baer India, tells Puneet Wadhwa FPI flows into Indian equities are likely to stay positive, given the likelihood of continued weakness in the dollar, peaking out of Covid-19 cases in India, and the domestic economy showing a gradual recovery. Edited excerpts:

Can the Indian equity markets sustain at these levels?

For the market rally to sustain, the broad-based market participation must continue, which we think it will. The Covid-19 situation in India should improve on the ground -- there are initial signs of tapering, since the second half of September. The progressive unlocking must continue, without any major reversal. We need a backdrop of global stability, and most importantly, there should be a sustained uptick in growth and demand indicators which will give confidence to domestic and foreign investors. The past couple of points are somewhat uncertain at this point, and therefore, may bring about some intermittent volatility in the markets.

What’s your global investment strategy?

Global equities still offer a generous risk premium relative to other asset classes and global consensus expectations continue to rise. Among the developed markets (DM), Julius Baer Global Research continues to favour the US equity market in light of its higher exposure to structural trends. Within EMs, Julius Baer Global Research continues to focus on China, which remains a core holding, and we remain optimistic around structural growth segments of the IT, health care and consumer sectors. We are underweight on Latam and CEEMEA (Central & Eastern Europe, Middle East, and Africa), as the absence of a commodity price recovery and fiscal constraints will weigh on the growth recovery. Julius Baer Global Research is ‘neutral’ on India, given the lack of fiscal space available with the government to stimulate the economy.

What's the road ahead for FII flows into Indian equities?

The depreciation of the dollar between May and August resulted in a pick-up in foreign flows into EMs, including India.  FPI flows are likely to stay positive, given the likelihood of continued weakness in the dollar, peaking out of Covid-19 cases in India, and the domestic economy scrambling back to a gradual recovery. 

What’s your market strategy?

We have a neutral view on the market right now, as the near-term global and domestic Covid-19 and growth risks are balanced by the improved momentum in some of the economic indicators. Nearly 40 per cent of the Nifty gains over the past six months is attributable to three stocks — Reliance Industries (RIL), Infosys, and Tata Consultancy Services (TCS); several blue-chip stocks are still languishing at levels seen six months ago. That said, over the past couple of months, the market breadth has improved, with mid- and small-caps attracting flows and starting to outperform; we expect this broad-based participation to continue, even if the Nifty does not move significantly in the near term. We continue to like mid- and small-caps. One can increase exposure to this market segment.

Which are overweight and underweight sectors?

We remain positive on health care, financials (private banks and insurance), telecom, chemicals, and consumption, although small profit-booking can be considered in the health care space due to the sharp run-up in stock prices this year. We are also positive on the growth prospects for the IT sector, but on account of the recent sharp run-up in stocks, we’ll look for better entry opportunities. We have turned neutral on autos, largely due to valuations. Despite healthy wholesale volume numbers (due to inventory filling), we will prefer to see a sustained retail demand pick-up as we get into the festive season.

Do you see banking stocks taking the lead and drive the markets higher?

The banking sector has significantly underperformed this calendar year, with concerns around the economic slowdown, moratorium, restructuring of loans, and a possible interest waiver plaguing banks. The recent announcement by the government that it may waive compound interest on MSME and personal loans of up to Rs 2 crore for the six-month moratorium period was on expected lines, and has removed an overhang. We feel banking stocks, especially the leading ones, are attractively valued and can emerge much stronger over the period, aided by strong liability franchise/fundraising capabilities, as the economy comes back on its feet in 2021.

At what point do the stocks of multiplex owners, hotels, etc become a buy?

Regarding the Covid-19-prone sectors, such as these, it will be difficult to estimate the pace of recovery because of uncertainty around the duration of the pandemic/availability of vaccine and the possibility of changed consumer behaviour. We expect that the leading (and financially strong) players will become stronger during this phase of normalisation. Investors who have an appetite for the intermittent volatility can selectively start cherry-picking in these sectors.