Markets are likely to remain volatile in the near future because the situation surrounding COVID-19 is still very fluid, in India and globally. Depending on how the infection rate will move, and what are the likely medical solutions, these will decide the volatility in the market. However, later part of FY21 is when some clarity should emerge, Harsha Upadhyaya, Chief Investment Officer - Equity at Kotak Mahindra Asset Management Company said in an interview to Moneycontrol's Sunil Shankar Matkar.
Q: Globally, experts foresee a recession for the next few quarters. Do you think that holds true for India also?
India in our opinion will be in a better position because of 2 reasons. One is our integration with global economy in terms of trade and commerce is relatively lower compared to some of the regions mentioned (United States, Europe, China etc). Second is coronavirus in India has been contained well until now.
While growth will get hurt across the globe, we believe India will be relatively in a better position. There is expectation of a recession in the global economy. That's something we need to watch out for. Even in India, a couple of quarters will see lower economic growth but we believe it is unlikely to get into recession.
Q: Experts are suggesting that Q4 earnings will not see much impact of COVID-19, but the first half of FY21, and the second half of FY21 to some extent will be bad. Your thoughts.
That should happen because as of now it looks like by the end of first quarter financial year 2021, we should be out of the lockdown situation. Post that, while it may not be a 'V' shaped recovery, gradually over a period of time, we should see economy inching back upward. While it is difficult to predict the time of revival, it may happen later quarter of FY21-22.
Today, across the board, all businesses are impacted in one way or another – in terms of growth, managing their cost, servicing etc. There is some amount of growth happening for essential goods; but real estate sector, for example, is unlikely to see any growth. Some areas where growth is happening is FMCG, telecom and pharma also seems to be ok. Rest everything has almost come to a halt.
Q: Pharma has seen a sharp run-up last week, especially after the government allowed export of HCQ, which is really helpful in treatment for COVID-19 patients and also due to defensive play. Do you think there is more to this rally?
HCQ sale is unlikely to benefit the entire pharma sector. In the last 3-4 years the sector has not done well and it was not a part of most of the portfolios. And today when we are evaluating various sectors and the impact of COVID-19, pharma comes along with sectors I mentioned earlier like essential goods, telecom, sectors that are less impacted. Also, as a whole, pharma sector is not leveraged so it seems to have done better.
Also, some believe that the government's focus going forward will be on better healthcare so pharma sector will have some headway in terms of growth. While that may be true it is difficult to assume that pricing scenario will change much for pharma.
In fact, there will be more control of pharmaceutical prices given how each government will focus on healthcare. So I don't think it is a complete game-changing event for them. But yes, if some vaccine or cure for COVID-19 is found, that particular stock will do phenomenally well. Overall, defensive nature of the sector and under-ownership has led the sector to do better.
Q: What is the view on the IT sector as a whole?
There are 2 things positive for the IT sector. First is that the balance sheets are very strong, not leveraged. Second is that it is not overowned by institutional investors; this is also true for the pharma sector; so to that extend it may remain defensive. Growth is definitely going to get impacted going forward. If companies are forced to cut costs, then they will be under some sort of scrutiny. New deals may take time to close. Growth will get impacted depending on which segment the IT company is working on. We could also see some consolidation in the sector.
Eventually, when growth recovers, some domestic businesses that are not leveraged, which have lower fixed cost, which have management ability, those will come out of the crisis better. Most likely, in each of the sectors, the leaders will continue to consolidate their position as they have management bandwidth, efficient business models and are less leveraged compared to others in the segment.
Q: The market recovered 22 percent from March 23 lows. FIIs also returned in April. What does it indicate? Has the market bottomed out or the bottom is yet to be formed given the likely COVID-19-led crisis in coming quarters, why? Also how the market will be look like in FY21?
Markets are likely to remain volatile in the near future because the situation surrounding COVID-19 is still very fluid, in India and globally. Depending on how the infection rate will move, and what are the likely medical solutions, these will decide the volatility in the market. However, later part of FY21 is when some clarity should emerge. And depending on the clarity, we can see upward movement in the market.
Q: What are you suggesting to your clients now given the attractive valuations across sectors. Is it the right time to accumulate stocks or let the market settle down before start buying? What should one do with his/her portfolio? What are those sectors one should look at and avoid, why?
Sectorally, I don't think this is the time to take a large bet. Situation is still evolving. We don't know if the entire sector will participate in the upside or only a few companies. So it is better to go with a diversified equity portfolio and leave it to the portfolio managers to manage it. As far as strategy is concerned, for such volatile times we suggest systematic investment plan. if market is going up one way, then lump sum is better that SIP. But since nobody can predict the market, it is advisable to do SIPs.
This is a period when one should not panic and get out of equity as an asset class. This is the time when investors can buy larger quantity of stock for the same price. One should continue to systematically invest and over a period of time they will get better returns – one should take care of their liquidity, their risk appetite as right now, this is a difficult situation for everyone where one needs to have a closer look at their liquidity also. Keeping that stability in mind, one should invest gradually through SIPs.
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