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Saion Mukherjee, head of India equity research, Nomura.
Saion Mukherjee, head of India equity research, Nomura.

Low rates, high liquidity here to stay: Saion Mukherjee

Beyond the pandemic, we shall watch out for the policy responses from the government, and their impact on growth, says Saion Mukherjee, Head of India equity research, Nomura

Despite the significant recovery in Indian markets after the lockdown restrictions were eased, Saion Mukherjee, head of India equity research, Nomura, said the stock market is not in a structural bull run yet. Post-pandemic, he is watching out for key themes such as the government’s policy response and impact of the reforms on the economy. Mukherjee said lower interest rates and liquidity can sustain the domestic economy, which in turn, will support market valuations. Edited excerpts from an interview:

Will the stock market rally continue? If so, how long will it sustain for?

The rally in the domestic market is supported by both internal and external factors. First, the severity of covid-19, measured in terms of mortality, declined significantly since the outbreak. In our view, emergence of repurposed medicines and better management of the disease helped reduce mortality .

Second, after the steep fall in earnings estimates in April-June, the earnings expectations stabilised as companies reported better-than-estimated results in the first quarter of the current fiscal, and the broader economy recovered from the lockdown.

Third, pandemic-related disruptions and policy responses have created new opportunities for certain sectors such as IT services, active pharmaceutical ingredient (API), pharmaceuticals and local manufacturing.

Fourth, a few large listed companies benefited from lower costs and market share gains. Finally, the external environment is benign with lower crude prices, and positive capital flows (an outcome of strong global liquidity).

We think that some of the above expectations are, now, to an extent, factored in.

Are Indian equities entering a new bull market? What are some of the key challenges ahead?

There are still uncertainties on the horizon. It may take longer for full normalization of activities. There are risks of a sudden rise in coronavirus cases as we are witnessing in some European countries. A treatment or a 100% effective vaccine is unlikely in the near term in our view.

Further, there are likely medium-term adverse impacts on economic growth unless we see a strong pro-growth policy response. Even before the pandemic struck, growth was slowing despite significant monetary support by the Reserve Bank of India.

There were structural problems with lending institutions and consumers’ propensity to spend was gradually reducing. It is likely that the pandemic has aggravated these issues.

We need to wait for a few more months to get a sense of the true demand in the market. The current ramp-up in reported sales is supported by pent-up demand, one-time pandemic-related purchases and inventory stocking. Given these uncertainties, we prefer bottom-up stock picking and not assuming a structural bull run.

India’s return ratios are expected to improve by FY23, primarily driven by lower credit costs and lower tax rates. Do you agree?

As a base case, that is what our expectations are. Improvement in sales volumes, lower cost structure, and normalization of credit costs are factored in by FY23.

However, the key question here would be the extent of improvement, where the broader economic growth will be the key variable.

Indian markets are flush with foreign money. If global central banks start tightening policy post-FY21, will it impact the momentum?

Global liquidity has been an important contributor to support the macros and market valuations. Given our concerns on growth, tighter liquidity will most likely have a negative impact on market valuations.

Beyond FY21, what major themes should the Indian stock markets be watching out for?

Beyond the pandemic, we shall watch out for the policy responses from the government, and their impact on growth. Further, we are interested in the theme of shifting of manufacturing from other parts of the world to India, increased demand from healthcare services and growth opportunities for technology companies. Also, some companies will be benefitting from market share gains and lower costs.

What will be the major tailwinds for the Indian markets in the post-covid world?

We think lower interest rates and strong liquidity conditions can sustain beyond the pandemic, which supports market valuations.

Also, the pandemic further tilts competitive strength in favour of larger players. They can invest in newer technologies, gain market share and carry a lower cost structure.

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