'Good time to exit debt MFs, allocate 30% portfolio to equity MFs as valuations look fair'

Q: Do you think the market sentiment has improved or it is just a short term rebound in the market given the situation amid COVID-19 crisis?

The recent rally looks like a bear market rally which may be a technical bounce back rather than a fundamental pullback. It seems market has factored-in further monetary stimulus by global central banks and a possible cure for COVID-19 in the near term.

The selling may resume soon and get worse for the global markets if the global economic activity worsens further from hereon. Just to compare the FII number for Indian stock market, they sold almost Rs 1,02,000 crore during entire calendar year of 2008 while today monthly FII selling average looks even worse as they already sold Rs 82,000 crore only in the first four months of this calendar year. If FIIs extrapolate the same pace of selling then this maybe worse than 2008.

Q: As a wealth advisor, what is your advice to your clients now given the attractive valuations in equity, fall in oil prices and other commodity prices (barring gold)?

From here on a few sectors might start picking up at 'V' - Shaped recovery like Pharma which is already in place while others will have a 'U' - Shaped recovery. Quality blue chips stocks should be preferred over any other stocks as of now. From overall investment portfolio 30 percent allocation can be made in equity mutual funds and the rest 70 percent in staggered way in coming 7 months at appropriate entry points and in right sectors. Also, it is a good opportunity to move the money from select debt mutual funds to equity mutual fund schemes in a staggered way.

Q: Gold after a sharp correction resumed the rally again and hit a record high in India and multi-year highs in international markets on safe-haven demand. Is the gold rally indicating any global risk or is it just a liquidity-driven rally in yellow metal?

The fundamental strength is not visible in the global economies and might take a good few quarters to get themselves in the recovery phase. The yellow metal began the rally on this note and might continue further as the fall began with health crisis, later transformed to financial crisis and may end up as geopolitical crisis.

There may be a possibility where the US and Europe might retaliate against China in some sort of war (trade war etc) once the COVID-19 fever gets settled in their home countries and this maybe a possibility by end of this year.

Q: Every expert has been saying about recession due to COVID-19. But do you really think the situation is bad on the economic perspective (global and India) and on earnings front in India?

The global business activities have been halted for about two months now and further extension of global lockdown might trigger a worldwide recession with a negative GDP growth rate.

Individuals across the globe will focus more on need-based consumption rather than luxurious consumption (discretionary consumption). If this recession extends over a year, Indian corporate & economy might face a challenge as a lot of corporate houses and Indian government have a very high dollar denominated debt which may be a challenge to serve if economic activity does not resume soon. If timely action is not taken by the world governments, then this financial crisis may turn out to be a sovereign crisis for a couple of countries.

Q: History suggests that every crisis has opened up new opportunities (in terms of sectors/stocks) in the market. If it is true, then what are those opportunities (in terms of listed as well as unlisted entities/sectors on bourses) and where do you see the leadership coming from in the next rally whenever it will begin, and why?

It is true that the leadership changes with every crisis. For example, energy sector led the Nifty pack from 1996 to 2008 with over 30 percent weightage in Nifty50. Post 2008 crisis leadership changed to financial sector and banks led Nifty50 from 2009 till 2019 with Nifty weightage change from 11 percent to 42 percent.

In fact you may also infer that Nifty50 moved from 'Asset Heavy Business Models' to 'Asset Light Business Models' in last 12 years. This shift is in line with change in global business models where technology had been an enabler.

Every rally has a reason behind it, there was a credit expansionary phase post 2003 which led banks & NBFCs to go up substantially. If I remember correctly it was beginning of "EMI culture" in India.

In this phase we have seen financial sector has been a multi-bagger sector due to expansionary balance sheets and robust GDP growth. However, now in short term, it looks like ARCs may be in favour for immediate gains as we have a threat of negative GDP growth across the World. Globally, you may buy NBFCs and Banks' loan assets at 30-40 percent discount.

However, these opportunities may be there in unlisted space. Also, in unlisted space you may get some asset light business models where Artificial Intelligence may be an enabler.

In listed space, defensive and consumption sector along with telecom might lead the pack in the next rally as the world will focus on their local & non-discretionary consumption.

From medium term prospective, listed space will perform very well once the market settles as the valuation looks quite attractive.

Investors from unlisted space may also shift to the listed space to grab these opportunities as listed space is much more transparent, robust and have sound track record of performance to back up these attractive valuations.

Q: Do you think the coronavirus-led crisis will help India to focus on several opportunities that will reduce dependency on global counterparts (except oil) and ultimately will help India to achieve its $5 trillion target by 2024? Also, what could be those opportunities for Indian government and do you really think with this crisis the $5 trillion target is achievable by 2024?

Yes, this will be a great opportunity for India from a medium to long term prospective with new geo-political equation of world leaders. Post COVID-19 era, World will look for an alternative to China and that may be a great opportunity for our country to emerge as possible substitute to China by having appropriate economic, structural & legal framework.

We may become a global manufacturing hub by 2030, if we implement some due reforms in our land acquisition & existing tax structures framework. Demographically we are well poised to replace China as we have the youngest & cheapest labour available with the largest democratic & transparent economic structure in the world.

The chances of achieving the $5 trillion target by 2024 looks challenging due to uncertain times of economic crisis. This halt in business activities might take a few quarters to get back our economy in shape.

Q: If a person wants to make fresh portfolio or rejig old portfolio, what should be your advice, what should be one's strategy, what should be proportion towards each segment while making the portfolio etc?

Every investor should follow philosophy of 'Invest Rightly, Switch Timely'. Even our benchmark Nifty50 and BSE Sensex has followed this philosophy since inception. I have covered these facts on Nifty50 in one of the above answers. As an investor, we should invest in right asset class and product category at appropriate time, also switch timely or exit, to book our profits. We all understand various asset class however only a few MF investors understand the importance of right product category at right time. Just to substantiate, even in debt mutual funds category there are two sub-categories i.e Accrual and Duration.

Duration mutual funds (Underlyings - Government Securities) generated ROI of 9 percent to 15 percent in past one year due to falling interest rate cycle. Whereas in Accrual debt funds (Underlyings – Corporate bonds) generated only 7-9 percent ROI in last one year, even some from the Accrual MFs' category faced partial defaults in view of current economic crisis.

So even within debt mutual funds, one category generated ROI of 15 percent, while other category generated ROI of only 8 percent. Hence along with right asset class, right product category is equally import. This difference must be understood by each debt MF investor with periodic rebalancing in line with interest rate cycle.

In our view, it's a good time to switch from duration mutual funds to equity mutual funds in staggered way as equity valuation looks fair.

Also, we advise to stay away from select accrual debt mutual funds because if this global lockdown extends then some of accrual debt mutual funds category might face further default in their underlying investments in bonds & debenture. 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.