A top money manager on Dalal Street spoke of such a possibility this past week, pointing out how the elevated state of the equity market has helped equity and debt raising for Indian corporates wrestling with the disruption caused by the unprecedented health crisis. “So much so, it now almost feels like being at the right place at the right time,” he says.
Navneet Munot, Chief Investment Officer at India’s largest fund house SBI Mutual Fund, says the primary factor behind the rise in asset classes ranging from equities to bonds to precious metals has been a record surge in growth in global money supply. “The asset price inflation it has caused is a key consequence of the unconventional monetary policies (UMP) pursued by global central banks over the past decade,” he said.
Munot said the performance of the financial market can positively impact the real economy. “Equity raises have risen meaningfully for example, as have debt raises. This has helped limit the damage despite one of the sharpest drops in economic growth. Bankruptcies have been prevented, and financial stability has been ensured, thanks to the abundant liquidity,” he pointed out in his monthly note to SBI Mutual Fund investors.
The market veteran highlighted that the rise in money supply would have gone into inflating the economy under normal circumstances. “However, given that economies are not fully open yet, money velocity has collapsed, and a large part of it is goin into inflating asset prices. This is leading to the disconnect between the real economy and financial markets,” he said.
India’s 50-share Nifty benchmark has advanced 30 per cent since the beginning of the financial year despite the Covid-19 onslaught and has almost erased all the losses it saw during the March meltdown in the wake of the pandemic breakout.
Munot oversees equity assets worth Rs 3.85 lakh crore. He said supply-side measures undertaken by the government to deal with the crisis have been in the right direction. “The Aatmanirbhar Bharat and associated policy changes should focus on creating industries of scale,” he insisted.
Nifty now quotes a 12-month forward price-to-earnings (P/E) ratio, which is near its all-time high of 20.5 times, and at a 35 per cent premium to its 15-year average. In the commodities market, gold prices have topped the $2,000 an ounce mark for the first time while domestic gold futures ruled at Rs 55,840.
All these measures will benefit the financial sector, help develop the corporate bond market, securitisation market and facilitate alternative funding mechanisms like AIFs and building of developmental institutions. “The global environment is evolving in a way that we increasingly look like being in the right place at the right time. We must not squander this opportunity,” Munot said.
While controlling the virus is the immediate need of the hour for the country, there is also a need to look at reviving demand through decisive fiscal measures, he said.
Commenting on the debt and equity market, Munot said the juiciest period for government bonds is behind us, but there still is room for term premiums to contract. “Credit spreads for better-rated corporates have shrunken and there is room for better transmission once uncertainty fades. Mean reversion in corporate profits is the key to equity market performance in the medium term. However, liquidity would rule in the near term,” he said.
The fund manager sees retail frenzy, plateauing of economic activity, a potential fiscal cliff in the US and uncertainty around the US Presidential elections as real risks to global economies.
Amid the ongoing uncertainty, he prefers to go bottom-up in Indian equities. “The unprecedented crisis will have a profound impact on the complexion of winners and losers of tomorrow, and identifying them early amid this chaos will be the biggest alpha driver going forward,” he said.