DAILY VOICE | Keeping in mind the volatility, prefer large & midcap fund: Meeta Shetty of Tata Digital India Fund

Q) Bulls roar on D-Street thanks to the massive liquidity from foreign investors. What is fueling the appetite for Indian markets – is it the MSCI inclusion, green shoots in the economy, the overhang of US Presidential elections getting over, or expectations of stimulus package?

A) I think it’s a mix of a few of these things. If you one look at the economic activity indicators, whether it be the supply side indicators like Cement, electricity, Coal production or demand-side indicators like Diesel/Petrol consumption, retail foot traffic, or tractor/car/2W sales, there are signs of recovery.

Liquidity has also supported the markets, the massive liquidity infusion by most govt globally has led to inflows in the markets. Even now if I look at the money market funds in the US, it still sits at a good $5 trillion+ size vs ~$3-3.5 trillion pre-COVID.

The US presidential outcome of democrats controlling the House of Representatives and Republicans keeping the Senate control should mean more consensus-based policies, which is positive for us.

MSCI inclusions has also led to certain illiquid stocks doing extremely well and we still have a couple of more days for this to unfold.

Q) India Inc. reported a stellar set of September quarter earnings where there were more upgrades than downgrades. Optimistic management commentary also lifted the sentiment. What is the growth outlook you foresee for FY21 and FY22 and is the Street discounting the same?

A) September quarter was clearly an above estimate quarter for Nifty 50 and this is giving a lot of comfort on the outlook for 2HFY21, in fact, we are seeing upgrades in Nifty EPS this time around, which has not been the case since past few years.

For FY21/22 the estimates are ranging round ~5%/30%+. On the valuations front, even after the rally we have seen so far, Indian markets are trading at near or slightly above its long-term average.

On a relative basis, too, if I look at the MSCI emerging market premium for India, we are at our trading closer to our long-term average of ~50%, so I would say we are closer to fair value on current estimates.

But, we had seen sharp earnings cuts in certain sectors, and if the indicators continue to remain positive then we can see some more earnings upgrades going head.

Q) How should one pick stocks in the current environment when benchmark indices are gunning for new highs almost on a daily basis? The valuations now look stretched and even the MCap to GDP ratio is hovering above the historical averages?

A) We as a house try and follow GARP as a principle, a good blend of both value and growth is where we find comfort.

The thumb rule of good management, decent balance sheets & cash flows, and improving ROCE are the core for stock picking in any market scenario.

The Buffet indicator or the Mcap-to-GDP ratio is looking higher due to the contraction of the GDP due to the pandemic, this year will be an aberration in many ways and hence I am not sure if one should read much into this.

Even at the current levels, though we are above our long-term average, we are nowhere closer to the highs of around 140 we saw in 2007. Globally too we are seeing this indicator at higher levels due to the GDP contraction and market rally, US for e.g., is around 190+.

Q) What is your view on the small & midcap space which sizzled so far in 2020 after 2 years of underperformance? Will the momentum continue in 2021?

A) The small and mid-cap space should continue to do well and there should be opportunities for good stock picking, the PLI scheme, govt focus on creating India as a manufacturing hub, steady economic revival, all this should throw up good opportunities in this space.

But, one has to keep in mind the volatility in the space vs large-cap, and hence a Large & Mid cap fund should be preferred.

Q) What should be the ideal investment strategy if someone wants to put fresh money –  wait for a dip, or buy at current levels? And how should one plan the asset allocation say he/she is in the age of +30 years?

A) The improving economic indicators and earnings upgrades give a strong outlook and hence investors with a long-term horizon should look at investing in the markets.

But, given that markets are at near fair value, one can see a range-bound movement for a couple of months, rising COVID cases globally and some states announcing lockdowns in India too can add to the volatility. So I would suggest, a systematic investment plan for investing fresh money.

Asset allocation would depend on the risk appetite of the investor, a decent mix of large/mid/small-cap funds can be added to the portfolio. Funds like Balanced Advantage also captures the equity volatility very well and hence would suggest to invest in that fund.

Q) IT and Pharma stocks have done very well since Mar, do you think there is still steam left in these sectors?

A) Both Pharma and IT have done extremely well and they are now trading higher than their long-term averages, but if I look at the Pharma sector, it's coming out from a bear run of almost 5 years. The outlook for the next 2-3 years looks very promising due to improving visibility on the US markets, improving cash flows, and leaner balance sheets.

So I think from a 2-3 year horizon, sector should continue to do well. On IT, the digital transformation push and acceleration due to covid should keep the momentum on revenues strong for a couple of quarters.

The deal wins we are seeing right now are more of smaller-sized ones but as the risk appetite of Fortune 500 companies increases in the post covid world, we should start seeing large deals coming back which should drive revenues over a medium-term horizon.

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