India has close to $500 billion in foreign exchange reserves and its growth prospects are much better than those of many other nations but the country’s ability to contain the fiscal deficit and bring it back to acceptable levels will be more important, Bhavesh Sanghvi, Chief Executive Officer at Emkay Wealth Management, tells Moneycontrol's Sunil Shankar Matkar in an interview. Edited excerpts:
Q: Despite a rally in broader markets, the majority of mid-cap and small-cap stocks are still 50 percent off their highs seen in 2017-18. Is this the time to pick these mid and smallcaps?
When markets correct significantly, it is only natural that the attractiveness of prices increases and one is tempted to buy stocks. Essentially, at such times, all stocks will look attractive and cheaper to buy, irrespective of whether it is a largecap, midcap, or a smallcap. But that does not mean that the stock is a buy.
Since 2017-18, there is a perceptible change in the way equity investments are made, that is, there is an inherent focus on quality stocks. Quality companies or stocks are the ones with strong balance sheets, good governance standards and those having a good market share or market leadership. It is these quality stocks that have done better than the rest of the lot.
In recent times, this trend has become stronger and appreciable price performance is seen mainly in quality stocks. Here I would like to add that quality is not something that is confined to any particular market cap but one is bound to find most of the quality companies in the largecap space and less sparingly in the midcap space. This is because these businesses have larger market capitalisation, established business models, strong client base, economies of scale, and a track record of weathering many a storm. This is precisely the reason why quality stocks surge or move ahead while others lag. For the sake of example, HDFC Bank, Whirlpool, Maruti or Berger Paints may belong to this category.
Q: The NBFC space started seeing a pick-up in demand in May. Do you like this space and would you buy marquee names in the sector?
The NBFC sector has been facing its own set of challenges over the last two years and these turbulent times have separated the men from the boys. The main issue was the liquidity constraints faced by them in the wake of the adverse market developments. This was quite visible in the housing finance segment too. It is those firms which had serious asset-liability mismatches that have faced problems.
To improve the conditions, the RBI initiated various measures to channelise credit flows into the needy sectors in the last one year. This has resulted in some improvement in the sentiment towards the NBFCs. We see the prospects better for those who have been offering product innovation along with servicing and facilities, in competition to traditional banking.
To cite some NBFCs, the top two or three NBFCs like HDFC, Bajaj Finance or Cholamandalam Investment have always been a good investment choice.
Q: Rating agency S&P affirmed its 'BBB-' rating for India and maintained a stable outlook on June 10 but last week, Moody's downgraded the foreign-currency and local-currency long-term issuer ratings to 'Baa3' from 'Baa2'. Should S&P's move be seen as a positive for India after Moody's downgrade?
The rating by Moody's was a notch above the rating assigned by S&P, and now they are on the same page. Neither the downgrading by Moody's nor the status quo by S&P is a big negative. This is more important from the perspective of non-rupee based investors, that is, an investor who is a foreign currency based. The rating provides them with a window to their decision-making about India. While India has close to $500 billion in foreign currency assets, and growth prospects of India are much better than those of many other nations, our ability to contain the fiscal deficit and bring it back to acceptable levels will be more important. In this context, policy makers must execute or implement reforms to support faster economic growth so that the country does not fall in the junk status. A junk status can trigger bond market outflows and weaker forex.
Q: How should one build a post-COVID-19 portfolio? What can be the next triggers for the market?
There is nothing like pre-COVID and post-COVID portfolios and the lesson that markets have reiterated is-- keep it simple and focus on good businesses with good management. I have indicated earlier in the conversation the type of companies that one should look at for investments. While investing in portfolios, portfolios which maintain holdings in quality stocks alone should be invested into because they have better resilience in times of a crisis like this. Good portfolios fall much less than the markets, and when the markets rise, they rise faster than the market.
Further, another basic test of portfolios is their track record, especially in the recent past or say last one year. Incidentally, I would like to bring to your attention the two strategies that we run at Emkay, the Emkay L.E.A.D, and the Emkay's 12 are two strategies which are based on the philosophy that I have tried to outline earlier for investor information. These are two high-quality portfolios which have consistently outperformed their benchmarks in the last one year. Professionally managed portfolios from both the mutual funds and PMS space selected using an appropriate selection methodology is what makes investment sense.
Coming to the key triggers for markets, it is just one factor that is important, that is the trajectory of growth, employment, and prices. The earnings growth and the level of interest rates, that is the cost of money, would depend on this one factor. This is also a function of what is happening in the global economies and markets as economies and markets are interlinked through trade and investments. However, any undue negative influence can be mitigated by investing in quality stocks and portfolios.
Q: Some analysts say that the market may have started discounting FY22 earnings expectations and that is one of the reasons for the rally? Do you expect strong earnings growth from FY22 on, given everyone is saying that FY21 will see weak growth and earnings?
It is a fact that a lot of optimism is getting priced in as of now, and that includes FY22 earnings expectations. Getting too much ahead of time and ignoring the real ground-level issues grappling the global economy is one of the key risks for the markets at the current juncture. We may see heightened volatility due to this.
Q: The entire banking space has been the leader in the current rally. Do you think this is a hope rally or the sector rally is ignoring risks that are likely to increase (in terms of NPA, etc.)?
Banking and financial services is the backbone of the economy which supply the raw material for the businesses. Therefore, they need to do well in the long run. Hope is playing a key role in the prices moving up, and the other major factor is the valuations. The valuations for some of the well- established banking franchises had become so cheap that they had to mean revert, even after factoring in the very real risk of a rise in NPAs.
Q: Most analysts say leadership changes in every bull run that follows a crisis. Which stocks or sectors can emerge as leaders in the next bull run?
Leadership change is not entirely a function of a bull phase or bear phase. It is dependent on the imperatives of the economy and factors of demand and relative value. While financial services continue to have a higher weightage in the indexes as of now, some sectors like consumption can start commanding higher positions, and therefore, higher market capitalisation over the next decade. But we should not forget the fact that a bull run is a rising tide which lifts all boats, while there will be a difference in the level of performance, most of the sectors and stocks tend to do well on the valuation front at least. In the current context, we believe that the traditional consumer-facing businesses with good cash flows and minimum leverage should do well, apart from technology, telecom, pharma, and speciality chemicals.
Disclaimer: The views and investment tips expressed by experts 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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