With the buoyancy in equity markets we have seen, a number of companies are lining up for IPOs (including some large upcoming IPOs), and we could continue to see more, if market conditions remain favourable," Sampath Reddy, Chief Investment Officer at Bajaj Allianz Life said in an interview to Moneycontrol's Sunil Shankar Matkar.
Q: Do you think the market entered into correction mode after a consolidation and rally seen in past few months? Is the valuation a reason behind this correction or something else, why?
Indian and global markets have seen a sharp and swift recovery (ahead of our expectations) since the March 2020 lows, and therefore there may be some profit booking happening from investors who have seen robust returns lately. The recovery in Indian markets has been helped by the opening-up of the lockdown, healthy recovery in various high frequency economic indicators (from April lows), better-than-expected Q1 FY21 earnings and some improvement in earnings outlook (especially for FY22), and progress in COVID vaccine trials.
With market recovery and with earnings expected to be muted in FY21, the 1 year forward valuation has risen and is elevated at this juncture (Nifty at above 21x PE)—which may also have also prompted some profit booking. But based on FY22 EPS, where a healthy corporate earnings recovery is expected, the Nifty index is trading at around 18x PE, which is quite reasonable.
There have also been lately some signs of a second wave of COVID cases in some of the major European countries (like France, UK, Spain), which is raising concerns of movement restrictions or partial lockdowns (and this could be prompting some correction in global markets). Besides, in India we have seen an escalation in COVID cases over the past few months--with India having the second highest number of cases in the world (after the US), and this is a cause of concern. However, the mortality rate in India has been quite low at around 1.5 percent and the recovery rate is high at around 80 percent, which helps to provide hope of some peaking-out in the next few months.
Q: Should one wait for more correction or is it a good time to buy stocks?
Its difficult to time the markets perfectly, but we think this is a buy on dips market. There is a possibility that in the near-term equity returns could be muted, or we may see some volatility. However, long term investors can continue to systematically invest in equities. Investors can also use any large market corrections/dips to make lumpsum investment in equities. Historical data (including the recent COVID related market correction in 2020) has shown that investments made in well diversified portfolio in challenging times can be quite rewarding for investors over the medium to long term.
Q: What are those sectors one should look for investing now and why?
We have been positive on both the IT & pharma sectors. Given the cash rich balance sheet, high return on equity (RoE) and attractive valuation multiples, IT sector is likely to be better placed in the current uncertain environment.
Pharma sector is coming out of the long down cycle, led by easing of pricing pressure for generics in the US market. Also, the companies have shifted the focus to profitable domestic pharmaceutical market along with exports. Cost rationalisation, especially on research & development expenditure, on less complex generics have also been adding to recovery in the profitability of the pharma companies. Clearance of plants by US FDA will support earnings for the sector, which was a concern earlier.
FMCG sector may do well selectively as demand remains strong, even though valuations are elevated in the sector. Select stocks in agriculture/rural space have been resilient to the pandemic and should continue to do well.
Q: FII turned net sellers in September after consistent buying in previous four months. Is it a major concern and why?
FPI equity inflows have slowed down in the month of September, and that could be due to the recent volatility in global markets. As mentioned earlier, concerns of second wave in COVID cases in some countries may also be contributing to some risk aversion. The US dollar has also appreciated over the past month, and this could be causing some outflows from emerging markets (including India). However, FPI equity inflows have picked up strongly from the month of May 2020, and in the month of October we saw a massive FPI net equity inflow of around Rs 45,600 crore (helped to some extent by some large QIPs). India has received one of the highest foreign inflows in CYTD 20 among peer emerging (EM) Asian markets, most of which have seen net outflows over the same period. Also, India has one of the highest overweight positions (relative to benchmark index) in portfolios of global emerging market funds and in Asia ex-Japan equity funds.
Given the healthy long-term fundamentals for India, we may continue to see strong FPI equity flows over the years, even though at times some of the risk-off events may lead to moderation in the pace/quantum for a short period.
Q: Monetary policy committee will be meeting next week. What are your expectations, will the MPC cut repo rate further or wait for some more time?
Given that inflation is still a bit elevated and above RBI's upper limit of 6 percent, we may continue to see a pause in the upcoming October monetary policy review. However, the RBI has mentioned that it expects inflation to moderate in H2 FY21, and that could open-up space for further rate cut/cuts going forward. The RBI has been announcing various measures to support the bond markets and manage/soften long term yields (like Operation Twist, OMOs, relaxation in SLR, liquidity support). We could see a continuance of the same and some more non-traditional measures to absorb the large upcoming supply in the fixed income markets to manage the yield curve effectively.
Q: What are major risks (global and domestic), one should keep in mind before investing? Is the US Elections outcome a risk for India?
Any change in monetary policy stance of major central banks (although not expected in the near term) could impact global liquidity—which has benefited global capital markets over the past few months. Any major geo-political tensions could also impact global risk appetite and impact flows. As mentioned earlier, a strengthening of a second wave in COVID cases being seen in some countries could cause some risk aversion in the short term, and a further escalation in COVID cases in India would be a cause for concern.
Q: So far 10 companies launched IPOs till September. Do you expect more IPOs to hit Dalal Street in coming months?
With the buoyancy in equity markets we have seen a number of companies lining up for IPOs (including some large upcoming IPOs), and we could continue to see more, if market conditions remain favourable. We have also seen some existing large companies going in for equity capital raising to strengthen their balance sheets and provide liquidity buffer to help deal with the COVID pandemic and growth slowdown.
The government has also stepped up its PSU strategic disinvestment drive, which had been announced last year to help deal with the sharp fall in revenue collections (as a result of the slowdown).Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.