As normalcy returns close to the festive season, the economic activity can see a significant come back in the second half of FY21. With interest rates, oil prices, inflation remaining muted, and the likelihood of a good monsoon, FY22 can be a materially positive year, Sailesh Raj Bhan, Deputy CIO – Equity Investments at Nippon India Mutual Fund, said in an interview with Moneycontrol's Sunil Shankar Matkar.
Q) Experts feel that the lockdown won't impact March quarter earnings much. What is your opinion?
A) Given the sharp market correction of over 30 percent in the last two months, markets have more than discounted the March quarter results. The focus of the market is now on the recovery of the economy from a virtually zero base of April 2020 as lockdown opens in the next few weeks.
Q) How do you see FY21 panning out? How about FY22?
A) For the first half of FY21, earnings are likely to be weak given the loss of first few months in the lockdown. As normalcy returns close to the festive season, the economic activity can see a significant come back in the second half of FY21. With interest rates, oil prices, inflation remaining muted, and the likelihood of a good monsoon, FY22 can be a materially positive year, possibly matching or exceeding FY20 and well ahead of FY21.
Q) IMF has said COVID-19 will result in a Great Depression-like recession. Do you agree? If so, is India better positioned than other economies such as the US, Europe or China?
A) Global economy is certainly in one of the weakest growth phases we have seen in recent times with most economies (excluding China and India), are likely to report negative GDP growth for CY20.
Indian economy will also face a slowdown given weak global conditions especially in export-oriented businesses like IT services and manufacturing exports.
However, on the domestic front, India is likely to be better placed to manage the slowdown but would require considerable fiscal and monetary support.
The fall in oil prices can create a positive $40 to $50 billion tailwind for India which in conjunction with favourable monsoons and low inflation can kick start growth even if global growth factors remain weak.
Q) The market corrected by 26 percent in FY20. Is recovery possible within FY21?
A) Markets being forward-looking mechanisms would look for improved earnings visibility. The strength of recovery around festive season this year will determine the extent of recovery in the markets. Most segments of the market are attractively valued with a 2-3-year investment horizon, especially pockets which have been in weak earnings cycles in the last 3 years and have a low-profit base to grow upon.
Q) At the current juncture, should one invest in a lump sum or in a staggered manner? Which sectors are you looking at?
A) Market collapses of the nature of over 30 percent declines come primarily on events which seem insurmountable and have low visibility of pace of improvement. Whether you see the tech bubble in 2000 or GFC crises of 2008, all had high uncertainty though were driven by different sets of challenges.
In 2008, countries were going bankrupt, currencies were as volatile as stock prices and the road to recovery appeared non-existent.
However, one of the biggest bull runs in US markets started in 2009 and continued till 2019 as conditions stabilise and growth recovered.
Interestingly, the present uncertainty provides an opportunity to acquire businesses and stocks at highly attractive valuations across a broad range of domestic, demand-driven sectors like Automobiles, Pharmaceuticals, Utilities, PSUs, Oil and Gas, etc.
Most of these sectors trade at valuations which are either 5-10 years lows on a low base of earnings, which provides scope for both PE and Earnings improvement over the next few years. The current conditions over the next 3-6 months should be used in a staggered manner to increase allocations to equities, with a holding period of at least 3 years.
Q) IT companies, so far, have reported disappointing numbers for the March quarter. What are your thoughts on the sector and their earnings momentum?
A) IT sector has most of its key customers in the most impacted geographies like the US and Europe; services being discretionary and outsourced are likely to face cutbacks in the next 2-3 quarters. Indian companies will handhold customers in these trying times by sharing a lot of profits and savings given the pressure on their consumers and likely to see a recovery only in FY22.
Q) What kind of stimulus package are you expecting from the government now?
A) Along with the normal opening up, there is a need to stimulate and prepone demand in sectors where most of our workforce is employed.
Take the auto sector for example. Domestic manufacturing accounts for 85 percent in the sector. It also employees a large portion of the workforce. The sector can benefit from time-bound GST holiday of 6 months which can incentivise faster replacement cycles preponing demand.
A policy like scrappage in Auto can also boost demand and bring forward consumption and kick start employment. The scale of the package must be significant to put the economy back on track.
Q) March inflow into equity funds and SIP were strong enough. Do you expect the same trend to continue in April too? March saw a strong inflow in equity and SIPs. What are your expectations from April?
The Industry has put in significant effort to promote SIPs with a view to tie over conditions like these which come once every 10-15 years. SIPs are a “strategy” to gain from these difficult times where investors can accumulate 30 percent more units as markets are down 30 percent from highs. SIP investors who have seen cycles, will see the benefit and stick with the strategy to gain from the current crises.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.