Markets to remain strong on bottom-up opportunities: Bernstein MD Garre

The equity markets will remain strong from the perspective of bottom-up opportunities, said MD Garre

After a sharp run since March 2020 low, there is discomfort on valuations, as these levels are the highest India has traded in the past, says VENUGOPAL GARRE, managing director, Bernstein in an interview with Puneet Wadhwa. Edited excerpts:

Can the frontline indices undergo a price-wise and time-wise correction now?

India is going through a normal macro turn -- from a phase of intense weakness led by Covid to a normalisation process, as activity levels resume across end markets. Such a turn will make growth rates appear high, with gross domestic product (GDP) growth remaining above the trend line until the September 2021 quarter. In addition, supply chain distortions will help tier 1/2 vendors temporarily gain share and margins, which will accentuate growth rates, making them appear as a strong macro cycle-led growth. These aberrations will ensure that there will be a belief in the sustenance of the strong earnings growth modelled by the Street. Some upgrades for the financial year 2022-23 (FY23) are also expected.

The equity markets will remain strong from the perspective of bottom-up opportunities. At the index level, however, while we expect single-digit returns from a point-to-point basis for the year, the first half of 2021 should overshoot the target. The growth focus of the Budget, however, makes a case for higher returns if the execution of the plan is done well by the government. That said, commodity prices -- including the future move in crude oil -- is a key aspect to watch.

How concerned are you about valuations at this stage in the absence of earnings?

There is discomfort on valuations, as these levels are the highest India has traded in the past. However, the continuation of an easy liquidity environment and aspects, such as willingness to keep higher fiscal deficit by the government, will likely keep valuations elevated. We believe that this year there will be broad-basing of returns, which implies that unlike the past few years when a few stocks dictated index returns and small-and mid-cap (SMID) performance was weaker, we now expect a broader set of stocks, including SMID, in general, to perform well. This is more in response to the improving economy off a low base.

Do you think the government has set itself another ambitious divestment agenda for FY22?

The target is ambitious as such levels have rarely been achieved effectively in the past. That said, the markets are more receptive now to issuances given the benefits of global liquidity. This will enable the government to garner interest in public sector (PSU) stake sales and strategic divestments. Favourable valuations for PSU stocks, in general, relative to market valuations is another support. The risks are usually led by the slow pace of execution on the plans and that remains an area of scrutiny this year, as well. Apart from the smaller quantum of divestments -- strategic sales planned in some PSU stocks – what’s worth watching is the ability to execute the initial public offer (IPO) of Life Insurance Corporation of India (LIC), as a large part of the divestment proceeds are expected to come from that. 

What has been your investment strategy since March 2020 low?

We decided to follow a recovery script-based approach to investing. From April, our focus was on sectors with strong earnings growth visibility and quality stocks, in general. We made information technology (IT) services and emerging tech business models, which we call as the ‘new economy’, the core and also went significantly overweight on the IT services sector in July. There were also pandemic-induced themes, such as consumer electricals/durables, given the need for home automation solutions were on the radar. As comfort level increased, we added more weight to recovery sectors, such as financials, multiplexes and construction in the early third quarter of FY21 (Q3FY21). Sustainable themes now will be centred around tech and part of the consumer supply chain, while recovery sectors, including urban plays, will help support returns in the near term.

How are foreign investors looking at India as an investment destination?

Foreign investors have been looking at India favourably, given the room for recovery this year on the macro front; usually, macro turns have driven foreign institutional investor (FII) inflows. FDI flows are also likely to accelerate and to move from tech to the real world, by which we mean infra assets being able to attract more inflows, helping the government and the private sector divest assets. We also sensed an optimism among foreign investors about India benefitting from the China Plus One opportunity. This is more led by a positive view from investors on the potential for success from the new production-linked incentives (PLI) program.

Their key concerns…

The concerns, if any, are on the ability of the government to manage a high deficit environment and the execution of the various initiatives. What they want to see is that the government should move from announcements to execution, so that there are real economic benefits.