Market movement in the short-term is hard to predict and does not have material significance in long-term wealth creation.
According to Swati Kulkarni, EVP & Fund Manager, UTI AMC, the markets will remain volatile given the uncertainties around the impact of the pandemic on the economy, consumer and borrower behaviour, income and job losses, MSME stress and the pace of recovery.
The peculiarity of this pandemic is that there is no play book to draw learnings from. Businesses, policymakers, lenders and investors are all treading cautiously. A few leveraged businesses have raised capital and cash conversion is the mantra. The pandemic has reiterated that the timing and nature of the risk is unpredictable, and no-one can eliminate the risk but can manage it. The quality businesses that generate cash flows consistently and earn higher return on capital employed than the cost of capital, exhibit earnings resilience.
The continuing high rate of infection and intermittent lockdowns are pushing further the recovery in sectors like aviation, hotels, restaurants, real estate.
As per Ms. Kulkarni, it is obvious that corporate earnings for this financial year will decline from the levels reached last year. Businesses have controlled fixed costs and discretionary costs. She believes that part of the cost reduction can be structural as corporates continue to allow work from home, use virtual means to connect, reduce travel expenses, resort to digital advertising etc. This will lead to margin improvement and lift earnings trajectory.
Over the medium term, corporate earnings are likely to improve as the policies announced in the area of agriculture, labour and manufacturing could lead to higher productivity and economic growth. The government may boost infrastructure development by leveraging the corpus of NIIF, thereby creating more jobs and the much-desired multiplier effect on the economy. The pandemic has necessitated global companies to consider “China Plus One” to de-risk sourcing strategies, said Kulkarni. With improving infrastructure, production linked incentives and competitive tax regime, manufacturing and exports from India could improve.
Rather than size, the businesses having strong competitive franchise are more likely to capture higher market share. With pricing power or cost advantage, such businesses have consistent cash flow generation, well managed capital structure and strong return ratio, which give them financial muscle to handle the challenging phase and capture growth opportunities.