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Last year was lot like the film “Amar Akbar Antony”. It was all about “Honi ko Unhoni karde – Unhoni ko Honi”. ‘Unhoni’ became possible in 2020. Flows, Sentiments and Fundamentals were the Amar, Akbar and Anthony of our markets. They made the ‘mother of bear market’ turn into ‘mother of bull market’ in just about six months. Flows came from FPIs and from retail investors.

FPIs pumped close to US$ 23 bn in 2020. In month of March, FPIs sold record Rs 60,000 cr. In turn in November and December, FPIs purchase was of Rs 60,000 cr per month each. This is a record that for two consecutive months the FPIs have purchased Rs 60,000 cr. FPI buying was complemented by retail flows.

Retail investor holding in market cap moved from 9% in Dec-19 to 9.8% by Sept-20. Between FPIs & retail investors, equity market may have seen an inflow of close to US$ 50 bn in 2020 - making this ‘Unhoni’ possible. Sentiments kept improving month on month as business normalcy and economic activity resumed post lockdown. Falling of the active case post Sept-20, also helped.

Flows and sentiments can be fickle. But corporate results in the Sept-20 quarter, and advance tax estimates for Dec-20, showed that fundamentals have improved significantly. In June-20, Nifty 50 company’s profits was roughly around Rs 46,000 cr. This was down by 49% on yoy basis and was explainable due to lockdown. For Sept-20 quarter, the aggregate profit expectation for Nifty 50 companies was of Rs 75-80,000 cr. The actual numbers came way above at around Rs 1.10 lakh cr. This changed the valuation orbit for Nifty. The index was trading at around PE of 35x and fell to 25x on this run-rate.

This improvement in fundamentals is the reason why the ‘Unhoni’ happened in 2020. If we have to do crystal gazing, we believe that FPI flows will be supported by central banks from around the world who are boosting liquidity. The G10 central bank balance-sheet now is crossing US$ 25 trn. This record money printing by central banks around the world should keep up the liquidity. The central banks have also cut interest rates rapidly. We believe that high liquidity and low interest rates will support equity valuations.

Sentiments will be reflected through volatility. If 2020 was about virus creating volatility, 2021 could be about the vaccine related news. Good news about vaccine availability and effectiveness is that it may support the market. Any doubts, worries on the quality and coverage of vaccination will create downward pressure on the market. Most important for market will be corporate earnings momentum. Sept 20 quarter saw record profits for Nifty 50 and market.

‘Bears’ are of the view that Sept-20 results were one-off. The cost cutting due to salaries and wage reduction and reduction in advertising. Business promotion and discretionary spends were cut to minimum. ‘Bears’ view is that this can’t be sustained. ‘Bulls’ are of the view that Sept-20 profit was despite fall in sales. Now with business resumption, and normalizing sales, the margins can expand. Also the productivity gains due to tightened working capital, tightened manpower spending and tightened supply management, all will help margins.

Our view is that some part of cost control will have to be reversed but most part will continue to reflect in margin. And we expect the corporate earnings momentum to continue in 2021 and support the market. Many people believe that stock market and economy are getting delinked and stock market is ignoring the reality of market. We think that stock market is only discounting the positivity about the future courtesy flows, courtesy sentiments and courtesy improving fundamentals.

Equity Market View:

For last three months, GST collection was above Rs 1 lakh cr each. GST collection in Dec-20 was the highest ever at Rs 1.15 lakh cr, suggesting improvement in manufacturing and services side. Growth in Power consumption indicates that industrial activity back on track. Dec-20 month saw 6% yoy growth in power consumption. Also, our forex reserves are inching up.

We are close to now US$ 585 bn in forex reserves which look set to cross US$ 600 bn in matter of weeks. Similarly, the Freight movement indicator shows increase by 8.5% as compared to previous year. Monetary and fiscal authorities are taking steps to improve the liquidity and give the required push. Now we are seeing improved fundamentals across business activities.

At the same time Covid issue also has been handled well. Active cases are coming down. The roll out of vaccine is also a positive. Many indicators are suggesting continued momentum in 2021. For example the PMI services is at 7 year high. Similarly PMI manufacturing is also trending high and is likely to continue.

On agriculture side, Rabi season sowing trends are good. Water reservoir levels are higher than average. And forecast for this season’s Rabi crop remains strong. Vaccination rollout is likely to reduce the threat of the 2 nd wave of infection. It seems like India has managed it well and a big spike may not happen. We also expect some momentum from government spending to come back. On yoy basis, there was short fall in first six months of this financial year. But we have seen pickup in the second half. This momentum should continue and help support growth.

But there are still areas of concern. For example, the unemployment has remained stubbornly high. Sure it has fallen significantly from peak covid period, but at 9.3%, the unemployment rate continues to remain little on the higher side. SME has not yet seen similar business pickup and momentum. Listed and large companies have been cutting cost and MSME vendors may see some impact on cash flows because of that. Thus we see that it may take few more months/ quarters for this sector to normalize. Inflation too has been above comfort level for some time now.

For lower interest rate regime to continue, inflation would need to be controlled. Another area that can come in and boost economic recovery is real estate. Some studies show that affordability has been showing improvement. Housing loan rates too are coming down meaningfully and bank rates are at around 7% level.

Thus, boost in real estate activity is expected. Another game changer for the economy over next 4-5 years is going to be production linked incentives (PLI). This is applicable for across sectors be it mobiles phones, pharma, automobiles, batteries, food products, textiles, telecom etc. our belief is that over time this scheme will add significantly to the GDP.

Roughly over five years round Rs 2 lakh cr is set aside for PLI schemes. This may act as strong impetus for manufacturing. In span of next five years it may act as a game changer and can add up to 1.6% in GDP by FY27. Marketcap-GDP is also trading at ratio of 98% against historical average of 75% marketcap-gdp ratio. Also, there were concerns in around Mar-20 period when SIP returns were in negative.

But those investors who continued with their SIP would have made good amount of returns. This is the importance of SIP. If an investor continues with disciplined investing and SIP, wealth can be created over long term. Prudent advice of distributors have helped many tide over bad times and encouraged many investors to ignore social media noise and focus on the path of financial discipline.

ESG Endeavors:

Kotak was the first AMC in India to be signatory to United Nations Principal for Responsible Investing (UNPRI). Kotak AMC has launched a dedicated ESG fund recently. We are taking steps towards improving governance, awareness towards society and environment among portfolio companies. We have also become a signatory to Climate Action 100+ on 12th January 2021, thus reiterating our commitment to ESG.

Debt markets:

Liquidity remains high at more than Rs 7 lakh cr. RBI has announced Rs 2 lakh cr special reverse repo auction. While Inflation has remained high above RBI’s comfort zone, the good news is that CPI eased to 4.6% for Dec-20. The pace of decline will improve the sentiment for the market. The core inflation has been well within the comfort zone. We believe inflation will come not be a big concern going ahead. We do expect that the steep yield curve may flatten over period of time.

FPIs have been net buyers over last 4 months. From bond market stand point, the current yield spread between 1 yr gilt and 10 yr gilt is close to two decade high. Similarly, at the lower end of credit rating (AA/AA-), spreads are still above pre- covid level. Investors can consider dynamic, credit risk, floating rate kind of products to capture the carry. Kotak AMC continues to maintain high quality allocation for its debt assets. Every fund strategy of ours from short term to long term and even credit fund maintains high liquidity allocation.

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