Stock market rally over, now focus on fundamentals, FIIs might continue to be net buyers | INTERVIEW

With the record-breaking rally on Dalal Street spreading to several months now, it could have now reached an inflexion point. Valuations of most markets around the globe are higher than their long-term averages which hint at the rally being more or less done for now, said Raghvendra Nath, Managing Director, Ladderup Wealth Management in an interview with Kshitij Bhargava of Financial Express Online. Nath added that 2021 will see the stock market move sideways but is hopeful that foreign flows will be dessert India but will continue to be net buyers. Here are the edited excerpts.

Stock markets continue to inch higher even after sharp sell-off, bulls do not seem to be giving up. Does this rally have more legs from here on?

This is probably one of the sharpest rallies that we have witnessed in the last 20 years. After the sell-off in March, the outlook was looking extremely bleak. Not only has the economy made a strong recovery, but the markets have also done a turn around in sentiments. With a constant flow of capital from FIIs as well as retail investors, it has been a one-way ride upwards with minor corrections in between. 

With markets at all-time highs, the valuations have also become fuller if not stretched. The global markets are inundated with money due to lack of alternatives and therefore the valuations of most markets around the world are much higher than their long term averages. The hope rally is more or less done now, any movement upwards would now be driven by the fundamentals and therefore news of earnings growth, macroeconomic data etc. will have a larger bearing in future.

Foreign investors have continued buying domestic securities, who do you interpret from this? Should markets anticipate a sudden withdrawal from FIIs?

When the Covid pandemic started, India was considered as a country at the highest risk levels as we have a substantial population below the poverty line and our medical infrastructure is much inferior to the developed nations. However, as it has turned out, India has managed the crisis extremely well debunking various fears. The Economy bounce back has more certainty in India than in many other nations. This is one of the prime reasons for FIIs’ bullishness. I think FIIs would continue to invest in India on a net basis as India offers one of the best alternatives in the Emerging Markets with excellent market regulations, depth and breadth of markets and growth potential.

India has taken reforms seriously in 2020, what positives can we expect these reforms to bring for investors in 2021?

Yes, both government and central bank have played on the front foot in 2020 to bring the economy back on rails. The ease of credit flows to the bottom of the business pyramid is going to have a salutary effect on GDP growth as well as employment; the PLI scheme if implemented properly can bring in much needed foreign players and foreign capital in many sectors; the government promise on escalating expenditure should result in higher Economic Growth in the next two years.

IPOs have been an easy way to make money for investors in 2020, is this trend likely to continue?

Every time the bulls enter the markets, IPOs become popular. Money making should never be easy and whenever it becomes so, one can conclude with certainty that the markets are tilting towards irrationality. If the bulls continue to charge ahead in 2021, the IPO market may also see the positive influence but it is advisable to always exercise caution when investing in IPOs.

Valuations are too stretched, how should one analyse stocks in such a scenario?

It is difficult to pinpoint on the right value that one should pay for any stock. And yes the valuations in many sectors are now definitely stretched. The best way to deal with such situations is to one look at long term while investing in stocks with rich valuations, but also at the same time take a pause wherever the valuations have stretched beyond reasonable levels and invest in other stocks or sectors. 

What is your suggestion for investors in 2021?

2021 is a year of hope after what people have endured in 2020. The equity markets are ending 2020 with a big bang having delivered one of the fastest recoveries in the history of the markets in the last 6 months. I expect that the markets should remain sideways as some of the after-effects of Economic deceleration would start becoming visible. While investors should continue to remain invested in equity markets, the return expectations should be moderate.