The reinjection of liquidity on March 13 in response to the small bank crisis had an immediate impact on global equity prices, with markets rallying from that day, according to Sanjay Mookim of JPMorgan.
The historical correlation of liquidity with market performance has been strong, Mookim, head of India equity research at JPMorgan, told BQ Prime's Niraj Shah.
"From 2008 to now, equity markets have moved entirely in line with the size of the balance sheets of the big four central banks," he said.
Despite contraction in the balance sheets of these banks, markets have defied that and remained elevated.
Everything else is an "entourage" to the main event which is liquidity, and "liquidity being where it could be, there is a higher probability of a corrective move world over and India will participate", according to him.
Key Themes
Growth Stocks
According to Mookim, growth stocks—or high duration stocks—have rerated more than the markets globally and in India.
Consumer discretionary, non-banking financial companies and mid caps, which are considered as the "growthy" sectors, have fared well from March up until now, he said.
If the thesis that the withdrawal of liquidity will pressure markets is correct, then growth as a style comes into pressure, which will mean that the sectors in this basket will also see pressure.
Private Banks
Mookim is 'overweight' on this sector as the space sees growth, lower earnings cuts, and interesting multiples, he said.
Power
This sector has caught everyone's eye due to announcements from the government as well as private companies, coupled with continuous announcements of large capex and order flows.
"We think this will continue. I would argue that multi-year capex is required in the power sector," Mookim said.
Due to the reforms and initiatives taken in this sector, the receivable situation has improved significantly, according to him. Statewise payables have fallen almost 50% on a year-on-year basis, and will likely remain contained. Therefore, the health of cash flows for people in this industry is much more assured than it was previously. At the same time, demand growth for electricity is increasing, he said.
"Over the next 2-3 years, you should start to see continued power capex in India."
Information Technology
"We remain convincingly 'underweight' on the sector," said Mookim. He attributed this to people not pricing in potential weakness in the earnings per share forecasts for most companies, as they expect growth in the top line and bottom line.
"The weakness does not appear to be part of the earnings projections, neither in multiples," he said.
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