What are Indian macros suggesting? Are we on the right track or heading towards a major slowdown?
The list of high-frequency indicators we track are showing definite signs of improvement. We saw a sharp recovery from April to July across key parameters like rural unemployment, auto sales, above-average monsoon and a sequential lowering of loans under moratorium. The PMI manufacturing index at 52 has shown a steady improvement after declining to 27 in April 2020. The unemployment rate has recovered to around the 9% mark from 23.5% in April. Moreover, the MGNREGA fund release by the government in the first five months of FY21 has reached 80% of the FY20 level, which we think should spur consumption. However, August has seen some weakness, especially on the unemployment front wherein the decline has stagnated. Overall, economic activity is picking up at a measured pace. There is still overcapacity, but that should get addressed as we see the overall economic outlook improving.
During your interactions with foreign clients, what impression do you get on their outlook for India? Where does India stand among emerging markets?
In our conversations with foreign institutional investors, their concern about Indian equities is apparent for two reasons: First, the decline in earnings estimates across most sectors in an environment of a sharp contraction in macroeconomic activity and second India’s premium valuations relative to peers, despite a sharper pace of earnings decline.
FIIs benchmarked to Global Emerging Markets (GEM) are neutral on India, having reduced their position from a significant overweight 2-3 years ago. That said, over the past couple of months, some investors have been pointing to earnings estimate recovery in some of the cyclical sectors and a demand recovery reported by consumer discretionary and consumer staples companies to argue in favour of increasing their India positions. However, on balance, such investors are in a minority today.
How is the shift in consumer habits following lockdown impacting various sectors?
What factors will revive Indian markets in coming months?
We believe that Indian recovery is largely hinged on the time it takes for the Covid-19 curve to flatten and eventually show signs of decline. Last few weeks have again seen a surge in cases, especially in the rural areas, which has impacted the nascent recovery as shown by some of the high-frequency indicators.
Second, the recovery from Covid-19 will also need to be assisted with a fiscal stimulus from the government which can then provide a boost to a potentially improving economic situation, and thus, ensure the fiscal stimulus bullet – which we think will be the last from the government – has its desired effect. Financials have not performed in the broader market recovery, largely on account of concerns with regard to moratorium and potential increase in NPAs. However, the recent one-time restructuring by the RBI should bode well.
Which sectors will see an immediate recovery?
We believe sectors that have already seen a large part of the recovery are consumer staples and the telcos as they were the primary beneficiaries of the lockdown. Sectors we believe that have already started seeing initial recovery are consumer discretionary as the timelines on work from home gets extended so do savings of the people which then results in discretionary spending increasing. We believe the increase in disposable income across income levels either on account of savings due to the lockdown or on account of free grains provided by the centre on a monthly basis has contributed to increased discretionary consumption. The auto sector also seems to be benefiting from the same along with the increased need for private transportation on account of Covid-19. We believe that the real estate sector will have a mixed outcome wherein we think commercial real estate might stagnate, while residential real estate is poised to make a strong come back. We are seeing affordability levels in line with 2003, which, along with ample liquidity and low rates, bodes well for a revival in the residential market.
What are the biggest bets on the stock market from BNP Paribas?
In our latest report, we created ‘BHARATH’ (Bharti Airtel, HDFC Bank/Life, Asian Paints, Reliance Industries, Avenue Supermarts, Tata Consultancy Services and Hindustan Unilever) – a basket of stocks which we believe have either positioned themselves within the Indian market to be successful businesses of tomorrow or have had business models with the potential to touch a billion people. We think such a reach enables them to withstand difficult business cycles and come out stronger as competition around them struggles. In the current uncertain times, we continue to recommend sticking to quality names which are largely captured in the BHARATH basket.
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2 Comments on this Story
Nuraj Bakshi38 days ago
indian equity has become shiitty market the day Modi taken the charge, people will lose all hard earned money
Suresh Kamath38 days ago
Good decent Bet on these List set by BNP Paribas and hope these Stocks would be appreciated and GAIN for the Long Term Hold