As I expect, since the bulk of the fall is behind us, one should start investing and then watch out for current circumstances. If the situation with respect to the virus does not escalate in India, then obviously people should invest sooner and more, Shreyash Devalkar, Senior Fund Manager, Axis AMC said in an exclusive interview to Moneycontrol's Sunil Shankar Matkar.
Edited excerpt:
Q: Has the market bottomed out after a 30 percent fall in the last couple of months. What are your views on the same?
At any point always it is very difficult to call the bottom of the market in a cycle, but one can broadly say that the bulk of the fall is behind us. However, the market is trying to factor in multiple things.
Globally, there is a scare going around the recession. In the US mostly banking & finance, sector-related stocks have fallen, and outperformers are FMCG categories. But the fall has largely been driven by the fall of banks and that is exactly what we are noticing in India, as well. There are a couple of things such as the fall in interest rates and potential concern over asset quality, resulting out of shut down.
Regardless of the path that the virus takes, it is important to note that it ultimately this is more of a temporary disruption that the economy will come out of – and so when we take a longer-term view – say 3-5 years, we don’t expect any lasting damage to the economy from the current events. While at this juncture we do not know how long this crisis may go on for, we do know that the Indian economy and markets are resilient enough to rebound sharply from this hit as soon as we win our fight against the virus.
Q: What are the kind of rate cuts that you expect in the coming months?
In India, policy rates were already low, though there is still room for further reduction considering the global rate cycle and inflation in India. But more than policy rates the transmission is most important. Liquidity is not a big issue, it's the polarization in credit markets that has caused uneven transmission.
Q: Will the repo rate fall below 3 percent or continue to remain?
While we can surely expect some cuts in the repo rate, the government still needs to check on how the coronavirus issue is shaping up in India before taking any action. Currently, there is no merit in jumping the gun and expecting quick reactions from monetary policy. The fall is largely going to depend on whether a lockdown kind of a situation lasts how long. Till then, the best option is to not make any assumption. And as I said earlier policy rates are low, though there is room to cut, the transmission is crucial.
Q: If the situation worsens, do you see more fall in the market?
As far as the market is concerned, I believe the market is factoring in lockdown kind of situation for a month or so. But further fall will depend upon how these one-two weeks shape up. Whether cases are more than expected, whether the disruption is limited to one month or more lockdown required. Hence the next two weeks are crucial from that perspective. If cases don’t increase much then we can actually see a bounce back in markets.
Q: We can see that FIIs are saving multiple billions of dollars in this market. With respect to investors from a mutual fund standpoint, do you see redemption pressure or will the SIP growth remain firm?
Investors, in last 3-4 years have shown lot of resilience across ups and downs in the market. We have seen 2008-09, when markets were tough, the flows were stable to rising. Market fall has been too soon too sharp, hence it’s too early to comment on impact of market fall on on flows. Let’s watch, how things shape up by this month end.
Q: Is there any redemption pressure at Axis MF?
Like I mentioned, it's too early to comment. Currently, we need to wait to see how the investors are reacting. But we believe that this change is temporary; there are no noticeable fluctuations as of now. Month end will be right time to comment on this.
Q: Do you expect FII inflows in the market right now? And will the SIP flow continue?
There will definitely be an uptick in FII inflows if the current situation gets managed well and we don’t witness a surge in fresh cases. FIIs have sold of early and they will be watching for the extend of shutdown and its efficacy on cases in India. SIPs too are relatively strong at the moment. We saw Rs 8,000-9,000 crore just last month. In last 3 years we have not observed sudden and lasting impact on SIP, of market fluctuations.
Q: What do you think about Rupee versus Dollar?
Crude oil prices being low is certainly a positive for the rupee value. If fiscal is not affected much due to current shutdowns, and urgent need to compensate poor and small businesses, at current low inflation we can have stable currency. Also the general interest rates have fallen. In such a situation, if the potential impact of the virus is not that significantly on fiscal, I think rupee will soon be stable.
Q: The government did indicate some form a fiscal stimulus, what are your thoughts?
The states have certainly announced multiple measures with respect to the virus. But I would like to still re-iterate that it will all ultimately depend on whether we go into a lockdown kind of a situation for long period of time. If we do, then the state and the central government will have to provide vulnerable sections of people and businesses with some kind of fiscal stimulus. While there is also going to be direct impact on tax collections, of the shutdowns. However, if it does not, then the construct is that we are in a good position as low crude oil prices continue to remain in our favor.
Q: The coronavirus has impacted everything currently - such as the US dollar, the bond market, trade etc. So do you see value in there (even if it is extremely risky)?
See as far as valuations are considered, they are definitely much cheaper. Prices are below value across the board. The trend is that when a virus scare of such a magnitude is felt, it has an impact on the succeeding quarter or two on the earnings. However, if you do the DCF valuation of the company, even a one-year washout in earnings doesn’t mean the impact on the value of the business to the extent of 30-40 percent, the way stocks have fallen.
So what really affects the market more in these situations, are the emotional decisions taken by the investors in the heat of the moment. When the scare of virus spread peaks out, that time the market will bottom out.
Q: With the current volatility, where do investors see value in the stock market? And where is the value in terms of sectors?
Frankly, most of the sectors the value is emerging across the board. All the sectors have taken a hit in some form of the other and have been impacted. I would say that it is only the FMCG sector that has outperformed to a certain extent while the valuation for all sectors across the board has fallen. Because the shutdown due to the virus as an event has questioned growth across sectors, be it IT which is global or consumption which is local.
Q: Still, if investors had to invest, what according to you would be the pecking order in terms of the sectors?
In India, the investment has always revolved around consumption as the core theme, irrespective of market conditions. When I talk about consumption as a theme, I am referring to retail credit growth at one end of the spectrum to staples and everything in between including apparel, jewellery, footwear, auto, etc.
This is what I believe the central theme would be - consumption. While considering valuations most sectors can show a bounce back. However, we need to be in surviving businesses and those who would be ready to grow in terms of financial capability, as soon as the crisis is behind.
Q: What should be the investment strategy in terms of portfolio, now? Should we hold on or add more to the portfolio?
As I expect, since the bulk of the fall is behind us, one should start investing and then watch out for current circumstances. If the situation with respect to the virus is not escalating in India, obviously people should invest sooner and more. Obviously, when there is such a sharp fall in the market (led by the virus scare), it is always better to enter the market when the situation has averaged out a bit.
It is important that we average the portfolio at a lower price. In equities, the investments are for a longer-term. And in 3-5 years, such events would have less impact.
Q: What about your portfolio, how are you managing the same this time?
We will continue to keep a track of the good companies and keep adding them after assessing them thoroughly. Watch out for quality businesses, with less leverage, high free cash flow and the ability to grow once the crisis is behind.
Q: How is the performance of the large-cap & the midcaps? What will give value in the next three-four years? And what about earnings?
Indian market being discovered now; I don’t expect much difference between large caps versus mid/small caps. I see similar returns across categories over 3-5 years.
With market fluctuations, it may affect the price of a particular stock but not have large repercussions on its value. Growth, high free cash flow, low debt, high ROEs, is where we always try to find relative value.
Earnings will get impacted because of the sectors that have more exposure to the global scenario like IT and some other export-related companies, will also be impacted. Extent of impact of earnings, it too early to quantify. We will have to wait till March and see how the impact of shutdowns unfolds in the country. One cannot say in absolute numbers. The earnings impact will be seen in this quarter but the bulk of it is expected to be seen in the upcoming quarters.
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