We follow Growth at Reasonable Price (GARP) which focuses on three segments i) Value with triggers, (ii) Earnings upgrade Cycle, and (iii) Thematic changes, Prathit Bhobe, CEO & MD, Tata Asset Management, said in an interview with Moneycontrol’s Kshitij Anand.
Q) 40% rally from the lows – who would have thought. But, the next big question is – are we out of the woods?
A) As we approach market levels which are now only 7-8% below the pre-COVID levels despite the cautious view, the incremental positive news flow (recovery in June, lower moratorium %, listed below) along with liquidity (global + retail) tilted the balance towards a steady climb over the last two months.
The consensus Nifty EPS for FY22 has been 15 percent so far with the risk of another 5 percent cut given lack of fiscal stimulus and staggered lockdown removal (ignoring the “extraordinary” nature of FY21 losses).
India’s valuation premium to other EMs which had declined to 20 percent in March is now at an average level of 35-40%. So, there is less room for outperformance, and correlation with global markets will be high (either way) from here on.
It will also depend on the pace of recovery (after the good progress made in June) as some of the recent events on the return of lockdowns in metros/big cities/less developed states could put the brakes on again.
Having said that, there are certain positives which have emerged and need to be borne in mind when – low bond yields and high global liquidity, long term opportunity for India to gain from the emerging supply chain and geopolitical dynamics, good monsoon prospects along with strong demand commentary from the agri-dependent sectors (agrochemicals, tractors) and promise of long-term structural reforms in agriculture, PSU privatisation and labour laws.
Q) Any particular investment philosophy which you follow?
A) We follow Growth at Reasonable Price (GARP) which focuses on three segments i) Value with triggers, (ii) Earnings upgrade Cycle, and (iii) Thematic changes.
We do not believe in deep value for the sake of it and try and identify opportunities within the value segment which have catalysts for re-rating which can come in the form of corporate action, management changes, capital allocation, to name a few.
Earnings upgrades (relative to street expectations) have the potential to generate higher alpha through valuation re-rating.
Q) News about the privatization of some PSUs really got the market excited. What are your views on that?
A) The government seem to be approaching the privatization potential more holistically this time around given the need to generate resources. Much will depend on the execution and demand as mega-privatization (like BPCL, Concor) is being attempted after a long gap.
But, it has the potential to create opportunities for investment in the PSU space especially the ones which have a relatively more sound business model and competitive advantage.
Most of the PSUs are trading at very reasonable valuations and dividend yield but as I mentioned earlier, that by itself has not been a driver of stock returns for a long time now.
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 the skeleton of lockdown are still hidden in the closet?
A) The ultimate impact of COVID on asset quality is likely to be known only over next 6-9 months. How much of moratorium slips into bad debts and whether the present COVID provisions are good enough to take care of that will be the key factors that will determine the performance of Banks/financial services stocks.
However, there are bright spots too in insurance and certain large private sector banks that will gain from the present dislocation in the markets especially since the valuations have come down to more reasonable levels and they are well capitalized.Q) There are talks of another stimulus package that could well come after the vaccine? What would you be betting on?
A) The government is trying to calibrate the timing of the fiscal stimulus to the opening up of lockdowns and the size to the fiscal space available.
Given the above constraints, we expect the future fiscal boosts to be small/medium in size and more targeted at specific sectors. It is therefore difficult to bet on directly on that when we make investment decisions.
Q) Which are the investment themes that one could consider amid the COVID environment?
A) Healthcare, insurance, telecom, pharma, and chemicals look promising as they would possibly gain in the post-COVID world.
Similarly, companies and sectors which are placed to capitalise on the shift in supply chains away from China could be a multi-year theme to watch out for.
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) Great returns are made when investments are made in not so good times. Buy and wait trumps wait and buy. Timing is quite futile and investments made in declining GDP environment have usually benefitted when GDP revives.
One needs to have the patience to wait it out and the investment opportunity is massive. Markets have bounced nearly 40% since Mar’20.
For someone who does not wish to time and is wary of volatility may consider Tata Balanced Advantage fund which navigates through the markets by automatically increasing or lowering equity exposure basis valuations. The fund has done very well both on the way up and when markets were down.
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) One should distinguish between investment and speculation. When one invests, they should do it with a view of owning a part of the business. Chasing prices upwards is usually speculative and liquidity led rather than any fundamental reason.
Suffice to say the world is flooded with a lot of low/zero cost money and this may get into risk assets leading to asset inflation. One needs to be careful and caliberated.Disclaimer
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