Harendra Kumar on why the Indian market may double in 3-4 years

"Rally likely to sustain 18,200-18,300 as flows start returning to India," says Harendra Kumar, MD-Institutional Equities, Elara Securities India

How are your interactions with your institutional clients going on right now? Have they started making sense of this rally?
I think the consensus trade had gone down to 13,500 and actually and at those levels fund managers were looking to buy afresh. And then suddenly, there was a whiplash at around 15,000 and so clearly the buy side or the asset managers are surprised at the speed of recovery in the markets.

But there was one intermediate trigger point that thankfully we captured when the S&P 500 gave a fantastic breadth thrust indicator where it had two consecutive days of gains. Our alternatives team actually captured that and thankfully we were able to ride this short burst in the recovery of the markets.

We think the trend will sustain for some more time till 18,200-18,300. It is not going to die down very fast because it has just resumed and that is where asset managers could go wrong because if they are on the sidelines, they will miss a phenomenal opportunity in the intermediate.

How are you recommending your clients to play this risk on? I know you along with your team. keep an eye on macros as much as on micros. Have macros started factoring in softer central bank action in the second half of next year?
The turning point for the market was the US Fed rate hike and where the US market thought possibly this is the end of or the slowing of future rate hikes and commensurate with that, the India banking system also started to re-price lower rates going ahead.

We are seeing benign inflation and expectation of further cooling off in prices from here till next year. That started working on the banking stocks and along with that,, we came up with follow through action on the bank stocks where the credit growth had zoomed to 14%. I think this is quite remarkable. The market is not yet cognisance of this growth but something miraculous is happening in the economy which is demonstrating that this credit growth is going to sustain, that is number one.

Valuations were also very supportive for banking stocks. While the headline number of macros is being demonstrated in the banking stocks, that will likely stay. That is the one important point and there is some level of stability coming on the metal stocks. But the other big number is GST collections which is giving a tremendous fiscal space for the government to go out and spend.

There has been a fantastic calibration on how they want to run the budget for the year and the market is also getting a sense that there is going to be no slowdown in the capital expenditure of the government. Now we are seeing the promise that Ms Sitharaman had made in the Budget that there is going to be crowding in of investments.

I do not know whether the markets have read through in the newsprint but we should have seen that the railways has already ushered in private capex. We are seeing Bharat Forge going out and announcing a tie-up with Talgo in a JV which is in the rolling stock in railways. We have also seen Titagarh Wagons announce a Rs 1,000 crore capex again on the railways front. We are seeing a crowding in of investments as actually forecast by the government, which fundamentally means that the capex cycle has much and many more legs to go from here.

So yes, we are very positive in terms of the economy from here on. We could see volatility and some short-term shocks but in the broader term, over the next 1.5-2 years, India should hold better than maybe China and other emerging markets.

How are you recommending your clients to play this strength which will be demonstrated in the economy?
For one is that the nominal GDP is going to be 14% for the current year and that means the earnings growth is going to hold and if the corporate earnings mimic the nominal GDP, we should be in good stead.

Number two is the headline print. We are going to move from $3.2 trillion to $5 trillion or slightly higher in the next four years. If that is the case, the markets will double in four years. At the headline level, that is a phenomenal return for any market worldwide.

Our per capita GDP is going to move from 2200 or 2500 to 3500 plus. This is going to unleash a dynamo in terms of consumption, property prices, credit growth and lots of variables will start moving which are not priced into the markets.

We have no doubt that India will be the top performing market in emerging markets. Already we are seeing our weight not so much as our own outperformance but also the underperformance of China, beginning to increase our weights in the emerging market index. This will start to hit inflection and will be the trigger point for flows to come back into India. So yes, beyond the current volatility, maybe one more correction could be the final one. India could be looking at a great outperformance over the next three years.

Did you just say India has a potential, the market has a potential to double in next three-four years?
Yes if we just track nominal GDP that number should be coming. Mr Surjit Bhalla has written a fantastic piece on how this is going to happen and recognised by the World Bank and IMF. I think the point getting missed is this is because we are hitting inflection in terms of the overall GDP multiplier. That should be kept in note when we forecast our corporate earnings numbers as well.

That could be crazy because if we are talking about the headline benchmark’s potential of doubling in the next four years, then a carefully crafted portfolio with smart alpha generating opportunities in midcaps can double the joy, isn’t it?
Absolutely. That is where one can see the buoyancy in the markets. Most global investors are more sanguine and gung ho about India’s prospects and even they will return. So if you are going to compound at that rate, there could be significant wealth creating opportunities for individual as well as institutional investors. There is no doubt at least in our minds in terms of the macro trajectory of the markets. But the caveat is we have to ride out the current volatility.

In the first fortnight of August, FIIs have bought shares worth $2 billion. They purchased stocks worth $750-800 million in July the first time in ten months. Can there be a scene where FII continues to buy or at least the reversal of last year’ brutal selling takes palace and local investors also continue to buy? Could there be a mad rush for Indian equity ownership?
Yes. Let’s take a step back. What has happened is the foreign money that came in Covid was close to around $30 billion. It went out over the last one year and the entire massive flow got subsumed by the liquidity which was domestically available.

This is no mean factor and should not be ignored which means that the volatility in the markets can be dealt with if there is an outflow from the markets. This itself is a very interesting development. Now the scenario that you are running is to have a steady growth in the asset managers’ pie.

The simple thumb rule is if the nominal GDP is doubling. The active money in equities with mutual funds will double over the next four years and there is substantial liquidity to support the markets and when such a thing is factored in or pencilled in, the FIIs will know that on risk adjusted basis, India will be an outlier.

That is when the markets will start to behave differently from currently where we are. While we are talking about this liquidity we should also be mindful that India is creating substantial investing opportunities in terms of the IPOs and new listing opportunities. It is not that all is going to chase the existing stocks. We are going to see a beehive of new entities that are going to list and create market cap and wealth. Some of the unicorns will also start to get listed. So yes, this money will come in but it will be distributed over a larger pie or a pot.

What are your overweight areas?
The banking index has got a tremendous value. Over the next four years, the banking sector will be outperforming. In the intermediate, we are seeing a pent-up demand recovery and margin story developing in the auto space. It is a Goldilocks period for the auto space at least for the next 18 months, that is number two.

Number three, of course, is the asset management piece and brokerages. They are currently in a cyclical downturn but if we keep the macro structure alignment in place, they could be great value stocks at the given moment.

The fourth is the power sector. I would like to add that they are moving from utilities to growth. They are going to see substantial capacity addition over the next decade and the last sector that I would like to have here is the defence sector. There are clear discernable steps taken by the government to reduce the import bill and get the defence sector indigenised. That is showing results now. The defence sector stocks have many more legs than the market is pricing in.