Investing is not about forecasting or predicting market cycles. The idea is to have a portfolio with a fine balance of defensives and offensives--75 percent of our portfolio companies are engaged in essential goods and services such as pharmaceuticals, value retailing and telecom, while the remaining portion has high linkages to the economy such as autos, cement and logistics, Siddharth Bothra, Fund Manager at Motilal Oswal Asset Management Company, says in an interview to Moneycontrol's Sunil Shankar Matkar. Edited excerpts:
Q: With the strong recovery from March lows, some experts say we are in a bull phase. Do you agree?
Market cycles are driven by innumerable factors, a majority of which are unpredictable and unknowable. This is also evident from the market moves and high volatility we have witnessed in the past four months. Hence, investing is not about forecasting or predicting market cycles and we do not attempt to do so. If we analyse the economic high-frequency data over the last few months, the economic activity due to the strict lockdown had nosedived and hit a low in April 2020 at around 35-40 percent of the normal. The gradual lifting of lockdown saw economic activity recover and snap back at a fast pace to around 70 percent in July 2020.
It seems that the easy part of the recovery is now behind us. The economic recovery from here on is likely to be gradual and dependent on how the current pandemic resolves and also on the stimulus measures the government takes. As such, we feel, that the current high beta broad-based market rally could from here on become more selective.
Q: Given the rally across equity segments, where will you invest your incremental money? Will it be in midcaps, expensive stocks, large caps or something else?
We are sector/ market-cap agnostic and continue to look for companies that meet our QGLP (Quality, Growth, Longevity and Price) criteria. Almost 75 percent of our portfolio companies are engaged in essential goods and services such as pharmaceuticals, value retailing, telecom, select BFSI plays and agrochemicals. The remaining portion of our portfolio is positioned in stocks with high linkages to the economy such as autos, cement and logistics, etc. This allows our portfolio to have a fine balance of defensives and offensives. While we are market-cap agnostic, we feel in the near term largecaps can be more resilient.
Q: India Ratings says there can be an additional Rs 1.6 lakh crore of debt turning delinquent between FY21-FY22, over and above the Rs 2.54 lakh crore that was anticipated prior to the pandemic. But look at the rally in banking and financials, what is driving this rally?
The banking sector has historically always been a very high beta sector given the leverage involved. Hence, in a downturn typically the sector falls the most and often is one of the biggest gainers in the recovery phase. As such, the recent volatility witnessed by the sector is not entirely surprising. The strong bounce-back was also helped by the RBI measures such as 1) providing additional liquidity to the sector and ii) regulatory forbearance in the form of six months moratorium. Nevertheless, the medium-term outlook for the sector continues to remain challenging.
The real economic impact of the long lockdown on consumers and companies will only be visible in due course. Hence, there is a risk that the sector may have to face increased stress, which experts have indicated could be around 4-5 percent of the banking sector. As such, one needs to be very selective and careful in investing in financial stocks.
Q: The benchmark indices and broader markets seem to be going hand in hand in the rally. What is the market pricing in now when everyone is saying that the first half of FY21 will be bad in terms of earnings and growth?
The current market move seems confounding to most participants. But if one were to analyse it in hindsight, then one can argue that the pessimism in March 2020 was perhaps overdone and laid the ground for long-term value-buyers to step in aggressively. The move post that got help from a sharp recovery in economic activity from around 35-40 percent of the normal levels to around 70 percent in a short time, excess liquidity and retail investor participation. Also, market is known for discounting ahead, hence market participants are looking beyond what will definitely be very disappointing FY21 to the possibility of strong economic revival in the next 12-15 months.
Q: The auto sector was one of the reasons for the rally, with experts saying that two-wheeler and tractor sales in June were better. Should one invest in the auto space?
The long-term outlook for the auto sector in India continues to remain attractive, given the demographic profile and low penetration. Within autos, tractors seem to be in a sweet spot due to the resilience of rural India. The demand recovery for the discretionary part of autos could be dependent on the pace of economic recovery. However, one needs to take a long-term view, as FY21 definitely seems to be the cyclical bottom for the sector and investors buying these stocks now can benefit tremendously from the cyclical sector recovery as and when it plays out over the next few years.
Disclaimer: The views and investment tips expressed by the expert 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.
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