'The market recovery is fragile.'
After near 50 per cent rally in the frontline indices from March 2020 lows, Raamdeo Agrawal, below, co-founder and joint managing director, Motilal Oswal Financial Services, in an interview with Puneet Wadhwa, cautions the day the market realises that earnings won't come back in a hurry, they will go sideways, or may correct.
Has the recovery since the March 2020 lows taken you by surprise?
Yes, the market recovery has come as a surprise.
The main problem for the markets is not COVID-19, but the fear of this pandemic.
Over the past few months, the fear has been subsiding, but the pace at which the market has recovered is a complete surprise.
Globally, we have never seen this level of liquidity and interest rates are near zero.
There can be some challenges to a company's business model right now, but the market expects everything will be back to near normal soon.
Have the markets run ahead of fundamentals?
Market fundamentals don't look very promising in the short run.
We have recovered very fast from the collapse which makes me worried.
The confidence to invest is slightly shaken.
Though I will still invest, the investment now needs to be spread out over the next few months.
It will be foolhardy to get into the market for speculative gains.
There is a hope of earnings growth coming back in the next six months -- one year, and that's what is also driving the markets.
The day when the markets realise that earnings will not come back in a hurry, they will go sideways, or may correct.
By when do you expect earnings growth to come back?
It is difficult to paint the corporate earnings picture with the same brush across sectors.
It is a very company-specific and sector-specific story.
Unless there is a vaccine in place, there won't be a full economic recovery.
FY21 will be a washout year as regards earnings growth is concerned.
Would you say the market recovery is fragile?
Yes, the market recovery is fragile.
The fall in March was real and we still have not come back to the pre-COVID-19 level.
The June 2020 quarter was a complete write-off for companies and it is expected that 80 to 90 per cent of the businesses will come back to life in the September 2020 quarter.
The economy, too, is likely to operate at around 75 to 80 per cent capacity in the September 2020 quarter, or maybe a little better.
What are the key risks to the market?
The biggest risk to the markets is earnings not coming through for whatever reason -- be it failure of the company, failure of the economy, failure of the global system or geopolitical concerns.
There are a lot of expectations getting built for earnings coming back in FY22.
This also does not mean the next three quarters will be fine and the markets will start firing up again.
There will be a gradual recovery in earnings.
In FY22, earnings should get back to the levels seen in FY20.
FY23 will be a period where we will see growth in earnings.
Several businesses have opened after easing of the lockdown. Is demand also coming back at the same pace?
It is a very complex situation in terms of demand and recovery.
All businesses will not see the same level of demand.
Businesses like aviation, hotels, tourism, and transportation will have to wait for some more time.
A lot of other consumer-oriented businesses, such as fast-moving consumer goods, are already running at pre-COVID-19 levels as people are using the products at home.
Even the broking industry is doing well given the surge in retail folios. What has been your experience?
Yes, some of us have been fortunate.
The broking industry is running at a historically high level.
The situation is unprecedented and the future is unpredictable.
While the markets are recovering, there's an outflow from mutual funds which is very strange.
Those who had entered at a higher level are now planning to exit as there is a recovery of capital.
For us, as a company, it was difficult to fathom how we will all operate remotely.
But in three days we made everything possible for the work-from-home scenario.
Today, we are doing all-time high business, that, too, staying at home.
Which are your overweight and underweight stocks/sectors?
We are underweight on lenders, maybe 3 to 4 per cent underweight, but we are massively overweight on the insurance sector.
I'm slightly tilted towards insurance because I don't know how long lending will remain dull and how big will the credit cost turn out to be.
All depends on how the government initiatives are towards the recovery.
If there is an economic recovery in the next 6 to 8 months, all the banks would be saved.
But if the government is lacking in that effort, the cost can be very high.
I'm keeping my bets open on both these fronts.