DAILY VOICE | Equity markets are looking at least one year ahead when earnings may recover: Rajesh Saluja

Hence a middle ground would be both the Centre and the states share the borrowing needed to meet the revenue shortfall of the states.

Q) What is your take on the June quarter GDP data?

A) First-quarter GDP numbers show a quarter of national income lost during Q1 but this was well anticipated as India imposed one of the severest lockdown measures.

So this is kind of an economic cost we were willing to pay to contain the disease. Things are clearly on a recovery path albeit the pace of recovery after the first bounce-back would be more gradual.

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However, the print is a grim reminder that growth cannot be taken for granted and one needs to continuously look for new drivers to propel growth – be it the ‘Make in India’ initiative, the focus on the new economy and the start-up ecosystem, continued focus on government mediated infrastructure creation, hastening stalled projects and resolution of restructuring cases, improvement in doing business indicators including tax regimes and so on.

We also feel that RBI would make a stronger note of some of these structural impediments to growth along with the deep downturn we have faced due to still ongoing COVID challenges and weigh it more vis-à-vis the more reversible spike in food inflation seen in recent past.

Hence, we expect RBI to stay accommodative for an extended time and come strongly against any unwieldy spike in the interest rates.

Equity markets are looking at least one year ahead when earnings revert to FY20 levels and the better-performing companies command higher valuations infusing momentum to the broader market as well.Q) Broader markets are back in limelight after 2 years of underperformance. How should one play the theme – should one increase exposure via individual stocks or by mutual funds?

A) Mutual funds root would always be preferred for diversification benefit and evolving strategies more in alignment with long term goals. The individual stock needs to be backed up by well-grounded research and context-specific calls that stand the test of time.

The market has become far more concentrated in recent times and what’s more important there has been a fair bit of churning even among the top slot.

Hence, selection mistakes are likely to be punished disproportionately. What must be avoided in the current juncture is trading based on stock tips as that has been a clear recipe for wealth destruction for retail investors.

Q) It looks like we are heading towards 12000 and then towards 12400 levels going by an estimate of one of the brokerage house report. The market is discounting a lot of things, but what could upset the appetite of bulls?

A) We are still dealing with the COVID situation that poses a primary risk of economic setback even if regional lockdowns are to be imposed now in a fairly ad hoc fashion.

Second, any geopolitical flare up at this juncture would have its attendant economic costs. The non-banking sector is another source of vulnerability.

Any global reversals primarily in the US would also have significant repercussions here as the market has become globally integrated.

Q) Sectorally, which are the sectors that will produce leaders of tomorrow and why?

A) Sectors with global exposures have been the most resilient and likely to remain so as despite the fall in global trade, competition has indeed intensified more.

Similarly, sectors that are emerging to play the China substation story viz., Pharma, Chemicals, Auto ancillary too are well-positioned.

Commodity could be an interesting anti-consensus play in case of a faster than expected global recovery becomes a reality. Global plays including direct global allocation should play an important role in any portfolio.

Domestically non-bank sector including insurance remains a long term play while we are cautious on banks because of NPA overhang, a judgment needs to be taken how much of it is already in the price.

Q) Are you also seeing a scenario where investors are selling funds and using the money to buy into stocks – is that rotation evident?
A) The role of intermediation is at its peak now given the challenges posed by the macro and market situation and the need for differentiation for generating alpha in such an environment. Since its rather easy to get it wrong, we won’t recommend this.

Q) What is the strategy which one should follow around asset allocation? How much money should one be parking let’s say in overseas funds or stocks?

A) The global allocation should certainly form an important part of any portfolio say around 10 to 20% within the permissible limits.

Fixed income is one space that provides a limited downside as RBI has displayed its resolve to bring the interest rate down and flatten the yield curve.

We are overweight on a fixed income with a concentrated focus on mid-duration plays in the Gsec/AAA space and avoid credit exposures.

On equity, we are broadly neutral as volatility is likely to be the norm and with valuations already fully pricing a recovery only long term steady-state growth is expected here onwards.

We remain overweight on gold as volatility remains high at the global level too. REITs/INVits has opened up another segment of good investment opportunity.

Ultimately asset allocation has to reflect suitable allocation among all these assets as per the risk profiles.

Q) There are more than 100-200 stocks daily which hit a fresh 52-week high on a daily basis. What does history tell us when it comes to putting money in stocks with momentum or in the stocks that are hitting 52-week lows?

A) Momentum strategies always attract traders. However, for fundamental based long term investors careful selection is what matters the most now.

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