DAILY VOICE | Don't see a major correction, positive on market from 3-year perspective: Pankaj Tibrewal of Kotak AMC

Having said that, we are positive on the small and midcap space with a minimum three-year horizon. While small and midcaps have risen from the March lows, they are still much below their January 2018 highs. Nifty Smallcap 100 is 38 percent below while Nifty Midcap 100 is 20 percent below their respective January 2018 high. The current downturn in the mid-small caps is already one of the longest and deepest especially for smallcaps.

There are many companies in mid-small cap segment across various sectors (tiles, plywood, agrochemicals, auto ancillaries, speciality chemcials, pharma, consumer durables, IT etc) which are strongly positioned on balance sheet and cash flows. These companies would get a disproportionate market share as the demand recovers and competitors with weak balance sheets are unable to meet that demand.

Our focus is on positioning the portfolio in such sectors and companies, to take advantage of the earnings recovery. Also we believe that FY22 should be a more normalised year for economic growth and when economy turns the corner and growth rate increases, we believe mid-small companies would benefit the most. Our belief is that bottom up stock picking approach would be rewarded in mid-small space.

Q: As the government is focussing more on Atmanirbhar Bharat, which sectors should one invest in?

Indian companies in sectors like Speciality Chemicals, Agrochem, Electronic contract manufacturing, API & CRAMS, Defence, Furniture, auto ancillaries and Consumer Durables can be beneficiaries of this shift towards indigenous manufacturing. Companies in these sectors would benefit not just from the Atmanirbhar Bharat movement but also because COVID-19 has led to a rethink on the robustness and resilience of Global supply chains.

Global corporation boardrooms are moving their discussion from "Just in Time" to "Just in Case" as far as supply chains are concerned. Many global companies realised that they were excessively dependent on China for their supplies and are increasingly looking at sourcing from alternate countries.

Indian companies in the sectors stated above which are globally cost competitive can benefit from this shift. Also government's recently introduced Production Linked Incentive (PLI) scheme could prove to be a game changer as far shift towards domestic manufacturing is concerned.

Global demand for some products in these sectors can be quite large and if an Indian company can gain some share of that global demand then it can lead to strong growth opportunity over the next 3-5 years.

Q: Lot of brokerages are tying up with global investing firms to offer their customers an investment opportunity in global stocks like Google, Amazon, Apple etc. Your thoughts?

Global equity exposure can provide a diversification benefit to investors especially to take advantage of themes which are not represented in the listed Indian universe. Our Kotak Pioneer Fund aims to provide precisely this diversification benefit to the investors.

Approximately 80 percent of its AUM is invested in Indian companies while the rest is invested in Global Tech leaders like Amazon, Visa, Tencent, Apple, Microsoft, Nvidia etc (via an investment in Signature Global Technology Fund).

Q: Do you think the market has to correct now given the over 50 percent rally seen from March lows or will the market continue its uptrend, why?

Yes we have seen a V shaped recovery in the markets from March lows. Compared to March when valuations were cheap now valuations have become fair at P/E of 21x one year forward earnings. Keeping in mind sharp rebound in markets and valuations, one can be tactically neutral on equities today from asset allocation perspective rather than overweight like in March 2020.

Also markets are pricing in sharp earnings recovery in FY22. The most important thing for the markets to maintain momentum or uptrend would be some kind of medical solution emerging over the next few quarters.

However, we don't see the possibility of major correction in the offing given the improving underlying narrative of opening up of economy and expectation of second round of stimulus along with news-flow related to COVID vaccine. Benign global markets and accommodative central bank policies with low cost of money, does provide a cushion to any major pullback, in our view.

While in the near term there are risks as stated above, we are positive on the markets from a three-year perspective as we see bottom up opportunities in sectors and themes described above.

Q: Auto has seen a sharp run up in last few months following monthly sales data amid unlock process and June quarter numbers. Should one invest in auto now or wait for correction, why?

On demand side, there has been a positive surprise in last 2-3 months as there has been a good pick-up across segments (except commercial vehicles-CVs) – tractor demand is higher than pre-COVID levels and demand for 2-wheeler and Passenger Vehicle (PV) is almost back to pre-COVID levels. Even in CVs, early signs of recovery are visible in demand for tippers due to pick-up in mining activities and increased construction.

However it's interesting to note that despite this recovery, FY21 industry volumes will be (1) 30-35 percent below peak levels of FY19 for PVs and 2W and (2) 40 percent and 60 percent below peak levels for MHCVs and LCVs respectively. In fact, in MHCVs, FY21 volumes will be lowest since FY04 and even in PV segment, FY21 sales will be below FY11 levels (2W sales in FY21 is almost back to FY13 levels).

We believe that auto demand is bound for strong cyclical recovery over the next 2-3 years – pent-up demand, rising aspiration levels and increased preference for 'personal mobility' over 'shared mobility' will be key drivers. This will drive strong earnings growth for the sector and there may be positive surprises as well.

Having said that, auto stocks have rebounded sharply from April lows and are up almost 70-200 percent depending on which stocks you want to look at. In several stocks, valuation have become rich and already factoring in strong volume recovery. Given that macro environment is still weak, there could be some hiccups in auto industry volume growth as well. Therefore, one may want to wait for better entry point in general.

Q: FIIs' monthly inflow in August 2020 has been the highest in last two decades? What does it indicate given the current scenario and government measures? And what are those sectors/segments getting more FII investment?

Indian markets have seen inflows of $6.2 billion during the month of August 2020, one of the highest till now. India is the only emerging market which has received positive flows CY YTD compared to all other major emerging markets. Increased FII inflow is a function of multiple factors: Globally there is ample liquidity and interest rates are at historic lows. Fed has been supportive of the markets and for the first time Feds Balance sheet has crossed $7 trillion.

Also there is increasing confidence around vaccine development This has led to increased allocation to equities globally and India has been beneficiary of the same. Beyond the near term COVID-19 impact, India is one of the fastest growing large economy with a stable political environment and an improving corporate profitability outlook.

FIIs have increased stake in Insurance, Consumer, Oil & Gas, Auto, Healthcare. In contrast, FIIs reduced stake in PSU Banks ,NBFCs, Telecom, Technology and Private Banks.

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