Financials and parts of consumption will likely see the sharpest recovery in the near term due to their under-performance, Taher Badshah, CIO – Equities, Invesco Mutual Fund, said in an interview with Moneycontrol’s Kshitij Anand.
Q) Indian market hasn’t looked back after hitting a low in March. Do you think the majority of the market has hit a bottom along with Nifty50? What is leading to optimism?
A) We would attach a very low probability of equity markets globally as well as in India re-testing the lows seen during March 2020.
One will have to see news flow deteriorate substantially with regard to the path of the virus and the economy for that to come to pass.
The recent upturn in the market is a result of 1) evidence of control over the pandemic across many parts of the world due to lockdown and social distancing initiatives taken in the last 3-4 months, 2) strong fiscal and monetary stabilisation measures initiated by various governments across the world since March, 3) varied efforts at treatment and cure of the virus at multiple medical institutions around the world that are currently in progress, and 4) economies globally attempting to emerge from a lockdown.
Moreover, Indian markets are also seemingly catching up on the stark underperformance relative to global and regional markets helped by a recovery in foreign flows.
Q) Which are the stocks and sectors that are likely to benefit the most as and when lockdown opens?
A) Since the lockdown in India was one of the most intense and comprehensive, it is fair to think that most parts of the Indian economy will be beneficiaries as we exit the lockdown, albeit to varying degrees.
BFSI and parts of consumer discretionary, which probably bore the maximum economic brunt during the lockdown and were the most severe underperformers, is where logically the recovery should be the sharpest.
Q) What is your call on financials, metals, auto, and realty sector? Each one of them is going through their own sector-specific troubles. How should investors play them?
A) We are overall neutral to modestly underweight on Financials and Autos at an aggregate level, though there are parts of these two sectors where we have more comfort than the rest.
For instance, in Financials, which is a balance sheet business and strength of the balance sheet is paramount in the current environment; we adopt a more defensive stance and stick with the best in class private banks besides certain non-lending financial businesses such as Insurance, Capital Market intermediaries and Asset Managers.
Within Autos, we prefer segments, which are relatively more mass essentials than high-end discretionary and a few select ancillaries.
Our exposure to a few metal companies is more an outcome of their cheapness than it being predicated on expectations of a favorable price cycle. As for real estate, we have had no exposure to this sector in a very long period of time.
Q) Which sectors are likely to lead the next leg of the rally?
A) As mentioned earlier, financials and parts of consumption will likely see the sharpest recovery in the near term due to their underperformance.
Should one see a more sustainable market rally into 2021 and beyond, it will once again center on financials, but broaden out to include even industrial and infrastructure.
Telecom and technology services will become a larger part of the ecosystem and should command a higher share of the market than today over the medium term.
Q) Monsoon got off to a stormy start – what is your outlook as to how will it pan out? Stocks & sectors that will benefit the most?
A) There was already evidence of a rural economic recovery pre-COVID, led by return of food inflation and rising rural incomes. Good rainfall in 2020 on the back of 2019 would further bolster this narrative of higher agricultural output and increased rural consumption.
Amendments to the Essential Commodities Act, APMC laws, and contract farming should go a long way in driving more consistent rural growth.
The situation around the return of migrants from urban areas and its near-term implications for rural employment, however, need monitoring.
Agri-products, mass essentials, agri-implements, and rural infrastructure-focused companies could be key beneficiaries.
Q) FIIs are slowly making their way back into Indian markets. After a strong May, it looks like FIIs will close the month in net inflows. What does it suggest about the future trend about the market?
A) It is always very difficult to predict foreign flows given its intricacies and linkages to global markets, risk sentiments, and overall global liquidity.
If one takes a more aggregated view, in this whole period of the last 3 months of the pandemic crisis, FII interest in India doesn’t appear to have waned by any substantial degree.
Admittedly, while there were few initial weeks of panic outflows, some of the large offerings by few of India’s biggest enterprises in more recent weeks appear to have evoked a considerable amount of foreign investor interest.
Q) The foremost emotion of investors right now is to preserve capital especially at a time when the demand has contracted, and salaried class is under the stress of job losses. What should be the strategy of investors?
A) Generally, a steep 20-25% cut in asset prices is a good starting point for investors taking a more considerate 3-5 year investment horizon. It may not qualify as the best time to invest in the markets but would certainly be one of the better times to do so.
An average investor will be better served by thinking about what kind of capital one is inclined to commit under such market conditions and identify the right kind of investment products to do so.
Low to medium risk multi-cap strategies with reasonable performance consistency could be a good starting point for fresh capital commitments.
In a post-COVID world, the new normal for India Inc. will likely involve dealing with a defensive consumer, cautious borrowing and lending practices, conservative capital investing by corporates, greater digital and online intervention and even higher dependence on state support for driving growth in the system.
Some of these considerations will have to be woven into a fund manager’s choice of companies while constructing a portfolio.
Q) Life after 10,000 on Nifty will change – do you think that increased optimism, and liquidity will also lead to sharp rise in the small & midcaps. We have seen that happening in the past few weeks?
A) Midcaps and small caps in the past did tend to play catch up after a bout of significant underperformance to the rest of the market, and this time may be no different.
The first round of recovery after any large economic crisis belongs to the best quality companies, be it in the large cap or the mid/small-cap segments.
Stronger evidence of a ‘back to growth’ economic cycle broadens the market and can even result in material outperformance of stocks in the mid/small-cap space.
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