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Last Updated : Mar 23, 2020 01:55 PM IST | Source:

‘Don’t look at bottom, use SIPs to take advantage of these large volatilities’

The inflation led recovery in earnings that most were factoring in, is also now likely to be pushed back. So, overall there is likely to be cut in earnings.

“We are now finding some businesses run by very competent managements that are now available at great franchise values from a longer-term perspective. We are adding those to our portfolios to benefit in the long run. So one has to follow a bottom-up approach about building the right portfolio,” Chockalingam Narayanan, Head – Equities at BNP Paribas Mutual Fund said in an interview to Moneycontrol’s Sunil Shankar Matkar.

edited excerpts:

Q) What are your thoughts on the market going ahead, do you think we are in 2008 like situation?


A) It may be difficult to say if this is similar to the 2008 scenario. However, when one looks at all the data points, the trigger has been at the onset of the COVID-19 virus which has set in motion a set of varied responses across different industries and that in turn has hurt the overall economic activity. At level one, there is a direct impact of lower productivity.

At level two, that implies lower inflation (demand-related) for a string of commodities. Economies that are dependent on commodity exports as their key revenue item will now have to face a reset and that in turn has ramifications for global trade for other products and services. So in that sense, we are in a bit of a negative loop. The global policymakers are obviously responding to this by providing higher liquidity and lower policy rates (from central banks) as well as fiscal stimulus (varied levels across different economies).

These could at some level soften the blow. What however can cut this negative feedback loop is if we find a solution for the virus and limit the extent of its spread. In that context, we in India need to watch out for the next one month very closely and as a population follow the instructions and advice of the health policymakers. Once this issue is sorted (hopefully before too many business casualties take place), the economies globally will pick up the pieces and start to rebound, especially given the amount of liquidity that has been introduced into the system in the last 45 days.

So in summary, we need to see that the virus infections peak out and that issue is behind us.

Q) The Indian equities have corrected sharply and now we are in the bear territory. Is it ideal for investors to catch the falling knife as history has relayed time and gain that after such routs comes sharp recovery?

A) On timing, it is difficult to predict the bottom. What could help is to keep the systematic investment plans going with the aim of taking advantage of these large volatilities in the market.

Q) What are you suggesting clients - stay away, invest in staggered manner or sell every rally?

A) Apart from SIP, if there is lumpsum money to be invested, then we believe that it is advisable to wait for the dust to settle on this virus outbreak and then consider deploying the incremental investments. On trailing PE multiples, while the markets are below long term averages, still there is some way to the bottom quartile as far as multiples are concerned.

At a stock level, we are now finding some businesses run by very competent managements that are now available at great franchise values from a longer-term perspective. We are adding those to our portfolios to benefit in the long run. So one has to follow a bottom-up approach about building the right portfolio and we are sticking to that discipline.

Q) Equity mutual funds saw more than Rs 10,000 crore of inflow in February which was higher than previous months, and also SIPs flow remained consistent around Rs 8,000 crore levels. Do you think the same trend will continue in the coming months or there will be large redemption in MF?

A) These are behavioural factors and very difficult to call on a month to month basis. Moreover, equity as an asset class is still a very small portion of an individual’s savings in India. If one looks at a 5 year or 10-year empirical data in the Indian markets, equity as an asset class delivered around 220-270 bps CAGR better** returns than the next closest asset class (among the 5 most popular asset classes in the country i.e., Gold, Property, Fixed Deposit and 10 Year T-Bill proxy for fixed income, data as of Dec 2019). In that sense, we can say that equity is poised to get its fair due in the longer run as far as individual’s avenues of savings is concerned.

**Past performance is no guarantee of future results.

Data source: Bloomberg, RIMES, Morgan Stanley Research.

Computation: internal.

Q) Where do you see value in the current market?

A) A lot of stocks are at attractive valuations – notwithstanding some near term pressure in earnings from the onset of this virus and the consequent impact on the global economic activity. However, one cannot look merely at price corrections to buy the stocks. One has to follow a disciplined approach to investing. At our end, we are following our BMV (Business, Management and Valuation) investment philosophy where we focus on the business first (typically those that grow better than nominal GDP and their respective sector, a sustainable MOAT, good track record on Environmental and Societal factors), management second (good capital allocation, corporate governance, execution track record) and valuation being the last. This has helped keep us in good stead through the various cycles and we are sticking to this.

As regards investors, they need to have a similar such construct at their end which suits their risk appetite and investment horizon, when investing directly. The other way is to invest through mutual funds and there depending on their investment advisor’s recommendation the suitable product. In these volatile times, it’s important to consider continuing to invest through the SIP route and in a staggered manner.

Q) Do you think the financial sector is still a mess or Yes Bank was the last one?

A) Yes Bank has seen a reconstruction plan where all large financial institutions in the country have come together to invest. However, more is needed to be done when the bank opens for normal business – especially with regards to the deposits; that is a behavioural aspect and always a difficult one to predict. We hope that the reconstruction scheme finds support from the depositors and to that extent the financial system becomes more stabilised.

However, calling it the last one may be difficult, particularly given that there is a demand slowdown in the economy and even now there are a few financial franchises that do not have a great liability franchise. Those will be stress tested and that is partly what the markets are already telling us. This is also being compounded by the slowdown from the virus which could test the debt servicing capacity of some more corporates at the margin. In that sense, we need to be more watchful. The good part is the policymakers are abreast of the situation and are taking necessary actions.

Q) Do you expect more earnings downgrade in current and coming quarters after the coronavirus-led supply chain disruptions?

A) While initially, it seemed like the issue could likely cause supply chain disruptions and related impact on cash flows as well as earnings, it has moved beyond that – and actually on the positive side for supply chain issues, given the improving situation in China.

On the other hand, though demand has become a problem given the larger developed economies are facing the brunt of the virus outbreak (likely to impact export-focused businesses) and it has seen some rise in cases in India as well (leading to a slowdown in activity and movement in some major cities in the country, thereby impacting consumer discretionary demand). In that sense, the impact is now shifted to demand-side one. The inflation led the recovery in earnings that most were factoring in, is also now likely to be pushed back. So yes, overall there is likely to be cut in earnings.

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

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First Published on Mar 23, 2020 01:55 pm
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