We would need an improving COVID situation, better economic activity, and further government support for the markets to sustain this up move, and the market may give up some of the gains if there are disappointments.But, I am more optimistic at this stage. I am focusing more on medium-term growth prospects while managing near-term volatility.
I am happy that the fund has held up well into the crisis as well as in the rebound. I think this is because we have largely focused on owning select high-quality franchises across various sectors.
There was some negative impact from select holdings in the financials and consumer discretionary names, but the overall stock selection has been favorable across sectors and we continue to stay with our fundamentals-driven bottom-up approach to investing in India.Q) Any particular philosophy which you follow while investing?
A) I have a clear philosophy to own high-quality businesses across attractive growth sectors in India. These companies are, in general, market leaders in their segments with competitive advantages leading to market share gains and high returns on capital.
The markets in India have been cyclical, with both domestic and global factors playing out, and we firmly believe that only a focused portfolio of high-quality businesses can sustainably grow and create value in the long term.
Our stock selection is based on deep bottom-up research across sectors and companies through our strong research team in India and our focus remains on continuing to learn and deepen our knowledge across our current and potential investments.
We are valuation conscious within our quality framework, and we do not look to buy stocks at a cheap valuation which don’t fit our philosophy.
Valuation is always the last step in our investment process as we believe that it is hard to value any company without a proper understanding of its business, and hence, that is where we focus more.Q) News about the privatization of some PSUs got the market excited. What are your views on that?
A) Yes, there has been some excitement around the new PSU privatisation drive from the government, but I think it could still be a long-drawn process from here.
I think long term, we will see both privatisation and consolidation in the government sector which will throw up interesting opportunities.
As investors, we are focused on two things - first, the long-term fundamentals of the business, and second, a management team that is completely aligned with the interests of minority shareholders like us.
So, I would be interested in specific opportunities here, but I will not play this as a theme. For example, there have been talks about the privatisation of Air India and Container Corporation of India, both of which are in the transportation sector but could be very different businesses and business structures.Q) Financials, including NBFCs, as a theme has turned volatile with selective outperformance. Considering the fact that it holds the maximum weightage in Nifty, should investors stay cautious as worst is not behind?
A) Financials always have a higher beta than the market on both sides. Hence, I am not surprised at the volatility here. Within the sector, we have seen a divergent performance in last the last three months, but you will note that this has been the case for the last 5-10 years as well.
As financials are leveraged businesses, we always need to be cautious and selective on financials through market cycles, but we have to be even more careful during a crisis like this.
On a medium to long term basis, I am still optimistic on selective financial businesses in India. If one has a positive growth outlook for India over the next 5-10 years, financials will still be a decent growth sector.
Within this space, we need to focus on businesses that will gain market share and compound profitability at double digits. While I agree that there are many uncertainties in the near term due to the economic impact of the lockdowns, but that’s also an opportunity to differentiate between the good and the bad companies (both banks and NBFCs) while they are mispriced in the market, as this would not be the case for long.
We have seen assets under moratorium declining for most of the banks in Q1 and that’s a positive signal on asset quality.
So overall, our focus will be on companies where we can see differentiated underwriting and strong capital position as I continue to believe that the financials sector still provides better investment opportunities than the rest of the market.Q) There are talks of another stimulus package that could well come after the vaccine? What would you be betting on?
A) I think the stimulus package, if any, would still be measured, given that the tight fiscal situation and the fiscal discipline the government has shown in the past.
I would like it to be more focused on certain sectors, such as hospitality, infrastructure, real estate, etc., as these sectors are mass employers at the lower end of the pyramid and hence will make the maximum impact on the economy and employment.
I also think that a good fiscal package post-discovery of a vaccine makes more sense as it could act as an accelerator at a time when the uncertainty would be low.
While I would not bet completely on a large package in the next 12 months, and I do think that there are opportunities in the fixed asset investment segment (where we are focused on) that can do well in the recovery, post-COVID, and will be bigger beneficiaries if a package is announced.Q) Which are the investment themes that one could consider amid the COVID environment?
A) On investment themes, two sectors that have done best across markets globally are technology/digital and pharmaceuticals (especially biotech). In India, we don’t have a big presence of these sectors, but we have seen Reliance (a digital proxy), pharmaceuticals, IT services, etc., being the biggest outperformers during the crisis.
I think after this outperformance, we should be very selective in some of these areas and focus on companies that we believe will be more competitive over the longer term.
Furthermore, if we come out of the crisis in the next 6-12 months, I think there could be opportunities in the industrial and consumer discretionary sectors which have been hit hard during the current environment but have the potential of bouncing back from a low base in a recovery.
However, I would stress the need to be very selective and staying with the best quality businesses here.Q) At a time when the world is factoring in over a 5% decline in GDP growth for Indian markets and equally grim picture for the world. How can equity investors turn this around as an opportunity?
A) I believe markets are now looking beyond this year’s GDP decline and hence the recovery and the pace of growth in the next 2-3 years are more important.
Given the recent move-up, even if we see better numbers sustain and grow, the market could still be volatile. My view is that volatility is always an opportunity for long term equity investors and to use volatility to your benefit, the most important factor is the understanding of businesses you want to own.
One should not be just reacting to the price movement of a stock but to the difference between the price and intrinsic value, which you can only ascertain if you understand the fundamentals of a business.
I do think we can use this crisis as an opportunity to buy some of the very high-quality businesses in India which are cheaper than where they were before, and their long-term value may not be affected much by the crisis.
We will be taking some risks here but as equity investors, it’s our job to price a business and take risks.
With hindsight benefit, markets gave a very good opportunity three months back, but I still think that there are opportunities around in some of the areas that I talked about if you wish to take a long-term view.
I would still focus on the few best quality businesses and take valuation call with-in those names while refraining from low-quality businesses that may appear cheap.Q) Lot of new investors have joined the party on D-Street in 2020 – could be largely due to work from home, muted returns from MF, or extra income at a time when there are job losses. What are your views – will the trend sustain?
A) The interest from retail investors has picked up in the last three months and now stands at 70% + share of cash trading volumes, versus their long-term average of 45-50%. Again, this is not India specific and we have seen this across markets globally.
It has added further momentum to markets. I think factors like work from home, etc., might have contributed to this, but the key driver is still this large up move in the markets and hence increased participation by retail investors to chase this.
We have seen this cyclicality over a long period where non-institutional participation has been as high as 80 percent and low of 30 percent in the last 15-20 years in India.
In general, high retail participation may be a negative sign for the markets in the short term, but I would still focus more on a company’s fundamentals versus its market price.
I do expect this retail participation to remain cyclical and hence it should normalise at some point of time to its average levels.
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