Capital markets have been volatile amid the resurgence of COVID-19 cases in developed markets like Europe and America, prompting another round of lockdowns in several countries. There has also been a lot of uncertainty around US Presidential Election, results of which are expected this week. The BSE Sensex has slumped over 1,000 points since it hit the 40,794-level on October 14, tracking the global volatility. THE WEEK caught up with Naveen Kulkarni, chief investment officer at Axis Securities, to understand what is going to drive the markets in the months ahead and how the US elections could affect equities.

Q. We saw a sustained rally in equity markets since the lows hit on March 24. But, after topping 40,000 on the Sensex, markets seem to have become jittery. How do you see the markets moving through the next few months?

The equity markets around the world have staged a very solid comeback after seeing a significant amount of correction in the month of March. Volatility, as expected, has risen in the run up to the US elections. With a Democrat win, volatility is likely to persist for some more time on account of policy uncertainty but over the medium term volatility will decline and 2021 is likely to be a good year for equities.

Q. Much of the economy is now open, COVID-19 cases seem to have passed their peak in the country; the finance minister recently pointed out that GDP growth in FY21 is likely to be around zero per cent, which is much better than the sharp contraction that was expected. What is going to drive the equity markets from here on?

The GDP growth is likely to come back in the forthcoming quarters as expected, but a flattish GDP for FY21 still sounds ambitious considering localised lockdown challenges have persisted in the second quarter. However, equity markets are likely to perform in line with earnings growth in the forthcoming quarters. Earnings for most companies in Q2 have beaten expectations. Surprisingly, the banking sector has reported much better earnings with lower provisions and treasury gains. Thus, if the banking sector delivers growth in the forthcoming quarters, then the equity markets are likely to do well as BFSI (banking, financial services and insurance) has significant weight in various indices.

Q. Do you expect any impact of the US elections on Indian markets and FII flows?

Indian equity markets are strongly correlated with the US markets. In recent times, that correlation has increased to 80 per cent. Based on most opinion polls, the Democrats are likely to win the elections. It would be a major surprise if the Republicans win this time. With a Democrat win, the markets are more likely to correct as there is a likelihood of increase in corporate as well as wealth tax in the US. Correction in US markets will mean the markets around the world are more likely to correct. However, the chances of stimulus also increase significantly and the dollar could correct. This could lead to flows into emerging markets over the medium term which will help the Indian equity markets. So, over the short term, market volatility is likely but over the medium term we are likely to see the Indian equity markets surging.

Q. Based on the second quarter earnings announced by companies so far, how do you view corporate performance?

The quarterly earnings of major corporates have surprised positively. HDFC Bank, Infosys, Reliance, Bharti, Kotak, Asian Paints and midcaps like Kajaria have surprised the markets positively. The corporate earnings have been encouraging with lesser negative surprises like Maruti Suzuki, which underperformed the expectations. Overall, the Q2FY21 corporate earnings have been constructive.

Q. Which are the sectors that are looking healthier now, and where do you think pain points are likely to remain for some more time?

A. More sectors have started to look healthier now. The NBFC sector still continues to face challenges because of NPAs (non-performing assets) and future growth. However, the situation is improving even for sectors like real estate with volumes improving.

Q. What’s your view on the overall banking and financial services sector, based on the strong earnings announced thus far by a few lenders and the impact of the one-time restructuring that RBI has allowed?

A. The BFSI sector has reported better than expected numbers. The collection efficiency is improving and the system liquidity is quite robust. So, it is now only a matter of time when growth comes back for the banking sector. The NBFCs could still face some challenges on account of NPAs, but the challenges seem to be more manageable than they appeared to be a few months back.

Q. With cinemas opening, airline traffic also picking up month-on-month, what’s your investment view on these sectors that were impacted hard due to the pandemic?

The cinemas business is undergoing a massive change because of the way content is getting consumed. Global biggies like Disney have announced major restructuring of their businesses. While the surviving cinema exhibitors will still do well, but the whole business is set for a change. Airline business should pick up in the forthcoming months as business activity picks up. Business travel could still remain a bit subdued but it is more likely to see sequential improvement.

Q. What’s driving the rich valuations in consumer goods stocks and is it justified based on the Q2 earnings?

Valuations on PE (price to equity) appear expensive, but on other long term parameters like price to book, are still reasonable. Earnings expectations are still reasonable, and as the economy is expected to be back to full steam after the vaccination in FY22, the valuations will be justifiable. Thus, valuations are optically expensive but not in a challenging zone. Also, if we look at the market, the top 15 stocks have driven most of the returns and beyond the top 15 the markets are much more reasonably valued.

Q. Auto companies have seen a strong growth in the festive season. With personal mobility gaining importance amid the pandemic, do you think two-wheeler and four-wheeler companies are set for a rally now? Would you recommend some of them with valuations perhaps on the lower side?

Yes, the theme for personal mobility is strong and should sustain. The festive season sales will be critical to watch in the near term as that is the key to sustainability.

Q. The finance minister recently announced a few measures for the government staff, in a bid to boost consumption. Do you think there will have a meaningful impact and what more needs to be done to revive the economy by the government, particularly since RBI has little room to cut interest rates further as inflation trends above its comfort level?

The economy has to pick up and the real estate sector has to pick up. It is showing some signs of activity picking up. If RBI manages to maintain the low interest rate regime then the real estate sector could pick up and with that, the whole economy can pick up meaningfully. So, the real estate sector is the key for higher capacity utilisation and pick up in investments in the economy.

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