DAILY VOICE | A K-shaped recovery is in the offing; market near fair value: Vinay Paharia of Union AMC

Many economists are pointing towards a K-shaped recovery because of an increasing divergence among segments of the economy that are recovering and segments that are not. We believe most sectors shall participate in the economic recovery over the next 2 years, Vinay Paharia, Chief Investment Officer, Union Asset Management Company, said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpts:

Q) There is no doubt when people say that Mr. Market is the biggest teacher – the real guru. In the last six months, we have two different emotions – fear, and at the same time greed. What does history suggest how markets tend to behave under such circumstances?

A) I think markets are efficient most of the time, except during periods of extreme greed or fear. The volatility we saw in March-June 20 period was due to an episode of extreme fear, where the markets were trying to judge the impact of the pandemic on corporate fair values by assuming an extremely severe impact.

As the impact of the lockdowns and economic destruction became clearer, which was lower than earlier assessment, markets started bouncing back closer to their revised assessment of fair values.

Q) AMFI data showed that the total outflow from the equity scheme category increased to Rs 4,000 in August compared with Rs 2,480 crore registered a month ago. Is the investment climate-changing for fund managers?

A) We are not witnessing any material change in the investing landscape compared to the past. Our investment processes are robust to adapt to a dynamic business environment.

Q) Sentiment turn sour after global agencies penciled in a deeper recession in FY21. What are your views as to when we will be able to at least break even?

A) Many economists are pointing towards a K-shaped recovery because of an increasing divergence among segments of the economy that are recovering and segments that are not.

Due to the unprecedented pandemic induced fall in the economy, it is difficult to predict the pattern of recovery in the near term.

However, we believe most sectors shall participate in the economic recovery over the next 2 years, which we expect could be a broad-based one. The stock market is already pricing in a broad-based gradual recovery in the economy.

Q) What is your current stand on markets/Nifty – are you neutral, underweight or overweight? And, why?

A) According to our research, markets follow fair values over the medium to long-term. Based on our internal analysis, the Fair Value of the Nifty 50 Index in FY21 fell by approximately 10% from February 2020 levels, while the markets have also seen a similar correction.

At current levels, the markets are trading at a small discount to its current Fair Value. This value is likely to compound strongly driven by economic growth and hence we remain optimistic about investing in equities with a medium to long term time horizon.

In our Asset allocation funds like Union Balanced Advantage Fund or Union Equity Savings Fund, we are significantly overweight equity compared to the benchmark, highlighting our positive stance on the markets.

Q) After a lull flurry of IPOs hit D-Street in September, what does the IPO pipeline look like, and do you see any interesting IPOs coming up which investors should watch out for, and the ones which have already hit the market?

A) We need to examine each and every IPO carefully, on a bottom-up basis for its attractiveness. Since these are young companies with no listed track record, the level of due diligence required is higher.

We have been able to spot winners from some IPO’s in the past. However, we would advise investors to be cautious while investing in IPO as there are a lot of hidden risks in such companies that need careful evaluation.

Q) Loan moratorium extended till 28 September -- how will it impact banking, NBFC?

A) According to us, the ongoing pandemic can have a significant negative impact on the banking and financial services sectors. Banks or NBFCs which have high touch business model, like those of microfinance or vehicle finance companies in particular, can be hurt due to their inability to reach out to their customers for collection in time.

Also, lenders to small and medium enterprises may witness higher credit costs as such enterprises have seen a deep impact on their cash flows and business outlook due to the ongoing pandemic.

The higher moratorium or restructuring in these sub-segments of the sector points to potentially higher stress in the near future and hence we are underweight in financials.

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