Anand Shah, Head of PMS and AIF Investments at ICICI Prudential AMC, said that investors should maintain balance in allocation between large, mid, and small-cap names. A 60-40 split between large and mid/small could be optimal especially given the uncertainty the market is facing.
Shah has over 20 years of fund management experience in the Asset Management industry. He had previously served as CEO of NJ Asset Management and was also the Deputy CEO and Head of Investments at BNP Paribas Asset Management Company.
In an interview with Moneycontrol's Kshitij Anand, Shah said that from a risk-to-reward perspective, several strong mid and small-cap names have corrected and are currently available at attractive valuations.
Q) The second wave of COVID has gripped India fast and has forced many states into lockdowns in April. Do you think the market could undergo some consolidation or the worst is already factored in?
A) While the second wave was not completely unexpected, the pace at which the number of active cases spiked has been a surprise. As a result, we saw some restrictions being announced in different parts of the country.
The period of weakness we are seeing in the market is largely on account of the change in market sentiment. Having said that, our belief is that the impact of the second wave on market is likely to be far lower than what we have seen in the first wave.
Last year, it was the fear of the unknown which unnerved all the stakeholders which is no longer the case now. It is widely expected that the second wave is likely to peak out within the next month and we believe the market will find support around that time.
If this is the case, any negative impact on the market will be short-term in nature. Going forward, the focus will shift to vaccination numbers.
With the Government lowering the age threshold and making arrangements to improve vaccine availability from June/July onwards, we believe the most vulnerable section of the population will be fairly covered. So the fear of the pandemic too will retreat leading to an improvement in market sentiment.
Q) After Goldman Sachs and Nomura, economists warn of more cuts in FY22 GDP forecasts. It seems like the clock is ticking backwards. If the economy fails to grow in a manner that is discounted by the market, it will also hurt the earnings of India Inc. Your take?
A) Today, a significant portion of the profitability of Nifty 50 companies is from global markets. So, the earnings of these companies are linked to global recovery as well. To that extent, recovery in earnings depends on both global and domestic recovery. While India is still reeling under the COVID effect, there has been a significant ramp-up in vaccination across global markets such as the US, UK, Europe etc.
So, companies with significant exposure to developed markets such as IT, metals and mining, textiles, pharma, chemicals are on a better footing than companies that are dependent on domestic recoveries such as travel and tourism and hospitality-related sectors.
The size and scale of the industry/sectors which are going to be impacted by the second wave of the pandemic is likely to be relatively smaller.
The earnings cycle of companies related to domestic recovery has been delayed by a couple of quarters owing to the second wave. In effect, there will be sectors that will continue to report better earnings while pockets such as consumer non-durables FMCG are likely to report neutral earnings.
In fact, we could expect positive earnings surprise from sectors like metals and mining and core IT services. Hence, we expect more upgrades than downgrades from a medium-term outlook.
Q) Which sectors will be back in focus amid the lockdown like scenario? Which sector(s) should one add on corrections?
A) Segments of the market such as IT, pharmaceutical, textiles which are net exporters and are dependent on global recovery are likely to remain robust.
Given the support of global commodity prices, metals and mining and chemicals to is expected to do well. Telecom and consumer non-durables are the other sectors we are positive on.
We are selectively positive on banking and financial services, given that many of the players here have made significant provisioning last year and asset quality behaviour has been better than expected.
So, in case of a market correction, if any of these pockets witness meaningful correction, we would consider taking exposure to fundamentally strong names in these spaces.
From a risk-to-reward perspective, several strong mid and small-cap names have corrected and are currently available at attractive valuations.
So, one can take exposure to these names, the caveat being to maintain balance in allocation between large, mid and small-cap names. A 60-40 split between large and mid/small could be optimal especially given the uncertainty the market is facing.
Q) Which sectors will get impacted the most from the second COVID wave and why?
A) The businesses which are dependent on opening up of the economy will be the most affected. So, sectors such as restaurants, malls, airlines, hotels, and travel-related and to some extent commercial real estate will be under pressure in the near term.
The same is true for certain pockets in construction, because of labour non-availability or because of delay in obtaining requisite permission.
Q) Do you think the volatility caused by the second wave of COVID has given the opportunity to get into stocks for the long term? How deep the cut could be? What is the kind of fall you foresee in near future due to COVID?
A) The chance of a steep correction in the Indian equity market looks very unlikely for now. As we have witnessed in the past, stronger companies emerge stronger, propelling the market to new highs, every time post a crisis.
This occurs because strong companies improve their market share leading to a stronger set of earnings. This has been the case post the global financial crisis, taper tantrums etc.
As an investor, one cannot risk blindly investing in equities as it may lead to a negative investment experience. Hence, it is advisable to invest through mutual funds or PMS.
Rather than concentrating on which direction the market is headed in the near term, focus on investing for the long term. In the near term, there will always be some of the other risks playing out and the market could remain volatile.
Despite this, from an investor’s point of view, equity remains one of the promising asset classes to create wealth over the long term as it generates an inflation-adjusted return, is liquid and tax-efficient.
The flip side is that this asset class is very volatile when compared to other asset classes. If you are prepared for market volatility, it can be a friend but if you are not prepared, volatility can lead you to take wrong decisions.
Q) What is your call on the rupee? What is the range you see for the currency in the near future?
A) India’s situation in terms of forex reserves this time around is far more superior when compared to paper tantrum times. It is widely expected that in the US interest rates will inch higher and the US Dollar will strengthen in the times ahead.
Hence, there is a bias toward the rupee to depreciate. However, we believe that the Indian currency will be relatively benign, trading in a tight range.
Q) If one were to look beyond the pandemic times, how is India placed as an investment destination?
A) To begin with, if one were to look at macros, India is on a strong footing with record foreign reserves, stable currency is comfortably placed in terms of current account and fiscal grounds and inflation being largely under control.
Off late, the spike in inflation has been because of demand surge coupled with supply constraints. Over the next 12 months, supply constraints would be addressed owing to which inflation will be under control again.
In terms of corporate earnings as well, the outlook remains largely positive. The various reform measures introduced by the Government and the Reserve Bank of India’s accommodative stance to spur growth is likely to aid in the country registering decent growth numbers. All of it put together makes India an attractive investment destination.
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