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DAILY VOICE | This fund manager who manages Rs 10,000-crore AUM has a special message this Diwali season

My message to the investors is to believe in the Indian growth story. The economic reforms initiated during the last twelve months are enormous, says S P Prabhu, Chief Investment Officer, IDBI Federal Life Insurance.

November 03, 2020 / 08:25 AM IST

SP Prabhu, Chief Investment Officer at IDBI Federal Life Insurance, who manages an investment portfolio of about Rs 10,000 crore (spread across various asset classes), advises investors to have faith in India growth story.

Over the next 12-18 months, I see growth impulses slowly but firmly coming back to the Indian economy, he said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpts:

Q) What is your call on markets & earnings which are on the verge of hitting fresh record highs? And, will we be able to sustain it?

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A) The country is witnessing a phased unlock since June and the economy is heading towards a calibrated normalization. However, the degree and pace of normalization is varied across different segments of the economy.

The current stock prices are reflecting the normalization theme. The results of Q2 of FY21 show substantial improvement in top-line over the previous quarter. The healthy bottom-line performance is triggered by both cost optimization and volume growth over the previous quarter.

We believe that the market at the current level fully prices in economic normalization. Any further rally from the current level will have to be triggered by growth impulses in the economy.

Q) Your message to investors for this Diwali and your outlook for the next SAMVAT?

A) My message to the investors is to believe in the Indian growth story. The economic reforms initiated during the last twelve months are enormous, be it freeing food trade by amending Essential Commodities Act, permitting contract farming, more avenues for the sale of agricultural products by farmers, labor reforms through the codification of labor laws, proposed corporatization of Ordnance Factories, encouraging defence manufacturing by the private sector, privatization of PSUs, proposed restructuring of Major Ports, etc.

The supportive and responsible fiscal policy package coupled with the accommodative monetary policy will provide continued impetus to the Indian economy.

Over the next 12-18 months, I see growth impulses slowly but firmly coming back the Indian economy.  Once the signs of economic growth become visible, I expect the same to be priced in by the equity market.

Q) What is the importance of asset allocation and why is it more relevant when Gold and probably global investing might have delivered better returns than domestic equities?

A) The asset allocation decision of an investor should not just reflect her / his return aspiration but should be based on her / his risk appetite. It is essential to have a balanced portfolio with exposure to fixed income, equities, gold, real estate and liquid investments.

While it is important to re-balance the portfolio at regular intervals based on changing circumstances, a disciplined approach to investments pays off over the long-term.

Q) How will markets react if Donald Trump wins the US elections? Would that be good for equity markets? What is street factoring in? How will markets react if Joe Biden wins?

A) The opinion polls show Joe Biden currently leading by a decent margin over the incumbent President. A sweeping victory for the Democratic Party capturing the White House, Senate and House of Representatives will embolden the far left voices (read Elizabeth Warren, Bernie Sanders, Alexandra Occasio Cortez) to propose a radical agenda to address economic inequalities in the US.

This may entail heavy taxes, burdensome regulations, severe environmental laws, and a huge welfare state. If the Republicans retain the Senate in a Democratic Administration, the markets may heave a sigh of relief as any legislative measures will require bipartisan consensus.

A victory of Donald Trump is still an outside possibility. This would entail the continuation of existing economic policies. While the Republicans are likely to retain the Senate in such a scenario, winning the House of Representatives appears unlikely. A Democratic House is likely to block any Republican legislative initiatives.

Irrespective of the electoral results, the hyper-partisanship in US politics will continue unabated. The political space in the US is becoming highly polarized and any measure which requires political bipartisanship is difficult to achieve.

The centrist space in US politics is getting increasingly vacant with the Democratic Party shifting from Centre Left to the Far Left and the Republican Party shifting from Centre Right to Hard Right.

The markets are prepared for a Biden victory though concerns remain over the growing importance of the far left wing of the Democratic Party. A sweeping victory for the Democratic Party may trigger a market fall.

The choice of his Cabinet will reflect Biden’s Policy priorities. The mainstream stances of Joe Biden will hopefully moderate any extreme policy proposals from his Party’s noisy Left Wing. A Trump victory may result in a small relief rally but no substantial market movement.

Q) The investment universe has shrunk dramatically post the COVID outbreak as many businesses have moved to a new normal. Do you think investors should focus on profitability (growth), and not so much concerned above large, mid or smallcap?

A) I agree. Stock-picking skills have become even more critical in the pandemic era. While sectoral outlook and market cap are important determinants in building a portfolio, right stock picking remains the single most important factor in achieving its financial success.

Q) Do you think the recent micro-data suggests that green shoots are visible and that is one of the prominent reasons for the confidence we are seeing on the street?

A) We do see green shoots of growth based on lead economic indicators, sectoral performance data and anecdotal evidence. The continued foreign investment flows and the ability of companies to raise capital (both equity and debt) reflects the confidence in the Indian economy.

Q) PM Modi urged the people of India to enjoy the festivities but with caution as COVID is not over yet. Do you also advocate similar advice to stock market investors?

A) India seems to have flattened the COVID curve based on new infection rates and falling fatality rates. However, it is too soon to declare victory over the pandemic in the absence of a vaccine or a medical cure.

We need to be mindful of our vulnerabilities and continue wearing masks, keep social distancing, and maintain exemplary hygiene and sanitization practices.

Similarly, investors need to be mindful of COVID risks to the stock market. Any letting down of our guard due to complacency can result in a disastrous second round of pandemic spread.

The second round of rising infections is not our base case but is a risk that cannot be ruled out. A sharp market correction cannot be ruled out in such an eventuality.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Kshitij Anand is the Editor Markets at Moneycontrol.

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