As market scales new high, will D-Street see any profit booking?

We can expect sustainable, good quality growth returning both to the economy as well as corporate profitability, says Navneet Munot, CIO, SBI Mutual Fund.

How would you sum up the kind of challenges and the kind of victories that we have had this year with the pandemic, the sharp market fall in March and then the recovery that followed?
This has been an extraordinary year. The number of times we heard the word unprecedented that itself has been unprecedented because we saw an extraordinary health crisis and an extraordinary economic crisis. But the best part is that human ingenuity seems to be winning the war against Covid not only with a vaccine announcement, but in India also, herd immunity seems to be developing. I am not a medical expert but the way numbers are moderating, it looks like we are winning the war against Covid.

I am really confident that we are going to win the war against the economic slowdown as well. And with the policy stimulus that has come globally as well as in India, including the structural reforms over the next several years, we can expect sustainable, good quality growth returning both to the economy as well as corporate profitability.

What do you feel could be a critical step for us to really see the next leap in terms of a recovery?
In the last few months during this crisis, we have not lost an opportunity of continuing on the path of structural reforms -- be it agricultural reforms, labour reforms, a reform to boost manufacturing in India or a new education policy. These reforms will have far reaching positive implications. Building on all the other reforms that have happened over the five, seven years including the GST, financial inclusion, digitalisation so on and so forth.

The need of the hour is to also pursue financial sector reforms. Finance is the life blood of the economy and I hope over the next few months we start focussing on financial sector reforms. How do we ensure that we improve the absorption capacity of the global savings and also boost savings in India and channelize those savings into productive assets, ensuring that our financial system has the capacity, depth and is robust enough to ensure that our savings are channelized into the product assets. In order to reach our target of a $5-trillion economy, that would be one of the most critical steps. By and large, a large part of the legislative reforms agenda is behind us. Going forward, we need to focus on administrative and judicial reforms, the pace of execution, creating infrastructure and focusing on sanctity of contracts. Going forward if we do well on these counts, that would be one of the best few years ahead of India.

What do you feel is perhaps the best way to go into the year?
We have been in a long period of global deflation where growth and inflation have been below trend. We are going to see a reversal of that which should be a tailwind for India. We are going to see a long sustained recovery driven by all the way by structural reforms as well as supported by global and domestic liquidity, lower interest rates and lower corporate tax rate. It should be a lot more broad-based recovery.

We have seen a huge polarisation in the profit pool as well as in the market cap for companies that have higher growth and which are on the right side of technological disruptions. As growth becomes more broad-based and the profit pool is shared by a larger set of players, we should see a lot more broad-based rally going forward.

We have to keep a watch on the evolving Covid situation and we hope that we see one more round of fiscal stimulus which can kick start this engine for a sustained recovery in economic growth as well as corporate earnings for the next several years.

Do you anticipate any near term profit booking?
Equity markets never move in a straight line. There would always be correction even in a long term bull market. We must be prepared for volatility on account of any news flow from the global market or may be any domestic development.

Having said that, without repeating all the other factors that I have mentioned earlier, I believe it could be a long sustained cycle of economic growth as well as revival in corporate profitability. One more factor is a revival in the real estate sector particularly in the residential real estate, which is a large job creator and has a multiplier effect. We expect a recovery in that as well.

Looking at all of those, a stronger corporate balance sheet, relatively better financial sector balance sheet and a set of stocks or themes that have done well as growth becomes more broad based, companies with higher operating leverage or even a moderate financial leverage would be the ones one should look at.

In an environment where growth was scarce and money was very cheap, you were looking at a few of those growth stocks where you could discount cash flows far from the future and they were still valuable. Now as growth becomes more broad-based, expand your investment universe and there would be many ideas across sectors. In fact, some of the sectors that have been badly impacted by the Covid crisis, would see a lot more creative destruction, a lot more consolidation and the winners will be those with resilience and which have invested rightly and have innovated rightly. These companies would come out a lot more stronger.

The world is coming back to normalcy. We will go back to a similar kind of world where we were and some of those companies would be a big beneficiary of the steps that they have taken.