The recovery in headline GDP number will be gradual but real economic activity will revive in the ongoing quarter, says Rahul Jain of Edelweiss Personal Wealth Advisory.
Zero-debt companies offer an attractive investment opportunity, especially considering the recovery cycle that plays in the market. Sectors such as auto & ancillaries, midcap financial and infrastructure should lead the next the bull run, Rahul Jain, Head, Edelweiss Personal Wealth Advisory, says in an interview with Moneycontrol’s Kshitij Anand.
Q) Do you think the amount set aside by the government to help the real estate sector is enough? Will it revive investor sentiment?
A) The government had earlier announced a package of Rs 20,000 crore of liquidity to help boost projects that were on the brink of NCLT. The government has now announced the creation of a “professionally managed” Rs 25,000 crore AIF (alternative investment fund) for boosting stalled middle and low-income RERA registered housing projects.
Although a higher quantum could be required to solve the entire liquidity crisis and move the needle, but focusing on the execution of this first tranche is more important.
This is a positive step for NBFCs, with significant real estate loans as developers will get funds to finish their projects.
NBFCs with strong parentage support and a stable asset quality along with exposure developer loans are expected to benefit from the scheme.
However, the impact will be gradual as it will take time to set up the fund and select projects.
The stocks we think that could benefit from the announcement: HDFC Ltd, PNB Housing Finance, Piramal Enterprises, and L&T Finance.
Q) Given the fact that we are trading near record highs, what should be the investment philosophy?
A) While in price terms we are trading at record highs, but on valuation and multiple terms, equity markets are at cyclically attractive levels.
With such availability of value, investors should look to enter the broad market, starting with beaten-down sectors where earnings visibility would come from the recovery in the business cycle in the coming quarters. All in all, it is a prudent time to enter equities.
Q) We are almost done with the September quarter earnings. How has India Inc done so far? Any bright spots?A) While Nifty aggregate PAT or net profit grew by 10 percent, sprung up by the corporate tax rate cuts, EBITDA (ex. BFSI) de-grew by negative 2 percent, suffering from the continued weakness in demand conditions.
Public sector banks in the NSE-500 universe saw PAT growing to Rs 1,923 crore as compared to a loss of Rs 3,909 crore in Q2FY19.
Major Nifty surprise outperformance in Q2 came from SBI, ICICI Bank, Tata Motors, Asian Paints, Dr Reddy’s Laboratories, as well as Sun Pharma.
Q) We have seen largecaps leading the Sensex and Nifty rally while the broader markets still remain under pressure. Can we say big wealth will be created in quality small and midcaps if someone is looking at a time horizon of two-three years?
A) In valuation terms, the broader market ex Nifty is more attractive than the Nifty universe. In any recovery of a financial cycle, while major largecaps lead the rally, it is the better valued mid and smallcaps that give higher returns in the longer time horizon.
Thus, big wealth, with a two-three years horizon, will be created in the midcaps and smallcaps.
Q) With fixed deposit (FD) rates going dry, what are the other secure avenues of investment?
A) It is a well-known and widely accepted phenomenon that one’s investment portfolio has to be diversified across asset classes – primarily to provide safety against a volatile market scenario and secondly, to provide some visibility to the growth.
Debt allocations help in achieving these two objectives very effectively. You need to follow a simple thumb rule. Say you are 35, then at least 35 percent of your portfolio should be invested in debt assets.
This can be further refined by keeping in mind the risk-taking capacity and individual preferences. Some of the most commonly used debt instruments other than FDs are NCDs (non-convertible debentures), debt mutual funds and perpetual bonds.
NCDs are fixed interest rates instruments issued by corporates to raise funds from the market. They are listed on exchanges and are easily tradeable.
They have maturities ranging from two to 10 years. The best part about NCDs is that the higher the tenure, the higher is the interest rate offered, which is the reverse in FDs.
Perpetual Bonds are fixed interest bonds issued mostly by banks. These are perpetual in nature and have no maturity date. These are listed on exchanges but have limited liquidity. Plus, the interest payment is conditional to the profitability of the company.
Debt mutual funds are like any other fund which invests in multiple debt instruments. The investment will go into various debt instruments like NCDs, Perpetual Bonds and other options like overnight funds, G-Sec etc redemptions in debt mutual funds is easier however, their yields are also low to medium.
Thus, considering the mix of safety, better returns over a longer tenure, liquidity and other such parameters, it looks like investing in a decent NCD is a better option.
Q) ECL Finance, the NBFC arm of Edelweiss Group, announced NCD of almost Rs 500 crore. What are the plans?
A) Edelweiss is a diversified financial services group with businesses across credit, insurance and wealth management. We are not only an NBFC.
NCDs are a mode of raising funds by any corporate. Unlike banks, NBFCs don’t get deposits on a daily basis from customers, as a source of funds. Borrowing through NCDs gives us the flexibility of raising multiple tenure funds at the same time. This helps in managing the cash flows at the corporate level easily.
We will continue to raise funds via NCDs in the future as well. While we have enough liquidity available to manage the existing obligations that will arise in the future, the funds raised via these NCDs shall be utilised for onward lending.
Q) Do you think realty and autos could be the dark horse in the year 2020?
A) Both realty and auto sectors are interest-rate sensitive and are at cyclically low valuations. The repo- rate cuts and the subsequent fall in interest rates and increased flow of liquidity would aid both of these sectors.
Also, for the realty sector, increased government support would also be a catalyst for outperformance.
Q) Now, the big question: is the worst behind us in terms of domestic macros?
A) Most macro high-frequency data is bottoming out and the worst is behind us. For auto numbers also, the base will turn favourable from November and the headline number should look more pleasing thereon.
The recovery in headline GDP number will be gradual but real economic activity will revive in the ongoing quarter. Multiple small-government reforms will add up to improve consumer sentiment and the mandatory link of retail loans to repo rate will aid in transmission henceforth and will revive demand.
Q) Sectors likely to lead next bull run – insurance, AMC business or zero-debt companies such as IRCTC?
A) Zero-debt companies give an attractive opportunity to investors, especially considering the recovery cycle plays in the market. Also, investor focus should be on finding value as in phases of recovery in the financial and business cycle, value outperforms.
Thus sectors like auto & ancillaries, midcap financial and infrastructure should lead the next bull run.
Q) What should be investors’ strategy with respect to mutual funds?
A) Investors should ideally take exposure to multi-cap mutual funds as well as midcap and smallcap funds. As these funds start to find undervalued and attractive opportunities, and as the cycle turns, these funds should outperform. On the debt front, exposure to dynamic funds, corporate bond funds, and medium and long -duration funds is recommended.Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Are you happy with your current monthly income? Do you know you can double it without working extra hours or asking for a raise? Rahul Shah, one of the India's leading expert on wealth building, has created a strategy which makes it possible... in just a short few years. You can know his secrets in his FREE video series airing between 12th to 17th December. You can reserve your free seat here.