The coronavirus outbreak will have a significant impact on earnings, with hotels, airlines, auto and other discretionary consumption facing massive cuts, Manish Jain, Fund Manager, Coffee Can PMS at Ambit AMC, says in an interview to Moneycontrol’s Kshitij Anand.
Q) The Sensex broke below 30,000 to hit a new three-year low in the week gone by. An enormous amount of wealth has already been eroded. What is causing this panic in the market?
A) Markets have been fairly volatile in the last few sessions, as investors are jittery and quite understandably so. What started as a major health scare is now starting to take a toll on the economy as well.
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Sectors like entertainment, aviation, hospitality, discretionary consumption and financials are just some of the sectors that will see significant negative earnings impact in the current and the coming quarters. This is the first cause for investor concern.
Secondly, the uncertainty of timing--how long will this crisis last-- is again something that remains at the top of everyone’s minds. The element of uncertainty adds to the panic.
Third, valuations, in pockets, were already getting expensive and a correction was anyway due. However, we believe, that the greatest of businesses are best bought in the worst of times.
It’s times like these to build a portfolio of great businesses with a long-term investment objective to create significant wealth. Breaking the cycle of fear in such times is essential to building a strong equity portfolio.
Q) What will you tell those who are left with bleeding portfolios, even if they have invested in mutual funds?
A) The advice would be simple–first and foremost, do not panic. It never helps. Then, one should re-assess the entire investment portfolio, irrespective of asset classes it comprises of, in light of returns, your own risk appetite and optimal allocation.
The primary thing to remember is that quality always pays in the long term. Reassign your investments to reflect this. If the company is a leader with some measurable competitive advantages in a growing market, then the risk-reward in such situations is quite favourable in these times too.
Q) Gold, oil and equities are all moving in one direction. How should investors read this?
A) Well, it tells us that investors are panicking and dumping all asset classes. Such a situation typically arises every few years when confidence is completely shaken. The need of the hour is to maintain composure and keep investing in quality.
Q) Many investors want to take advantage of the fall in the market but have no firepower. What would advise--start a small SIP?
A) The thought process is correct but needs a slight modification. Rather than buying anything, many fairly high-quality names are now available at very attractive valuations.
One should be thinking of long-term portfolio building in these times. That’s what we at Ambit Asset Management believe.
Q) FIIs have been pulling out money from markets across the globe and India is no exception. What is troubling FIIs? Is it the margin pressure redemption, ETF selling or just the smart money moving to safe havens?
A) The issue at hand is that all major global economies are either in a shutdown mode or heading there. This has led to a flight to safety. Equity markets are heading southwards and bond yields are rising across geographies.
Q) With recession fears looming, investors should say goodbye to an earnings recovery for at least two quarters. What is the kind of earnings cut you are factoring in?
A) The impact on earnings is going to be significant, very significant. Hotels, airlines, auto, all kinds of discretionary consumption are all going to see massive earnings cuts.
However, we do believe that most of this has now been factored in to the price. I doubt anyone is expecting anything, in terms of earnings growth in the next couple of quarters.
However, the thing to keep in mind is that all this is temporary and things will recover from here. So, no need to panic.
Q) Some analysts say that the coronavirus outbreak is nothing like that what financial markets have faced, so the outcome, too, would not be similar. Does that mean that one should stay away from equities?
A) No, I disagree. Look at China and how quickly they have been able to control the situation. The governments, both central and state, have been quite proactive.
I do believe that the situation will come under control sooner than what most people are expecting. Hence, the impact on financial markets shall be short-lived and more so for quality names in equity markets.
Q) Which are the fundamentally strong stocks that you think are worth buying?
A) Without getting into specific names, all I would say is that one should head to quality. Several large-cap names are now available at distress valuations - I would suggest investors construct a portfolio of these names - something on the lines of our Coffee Can PMS.
Large-cap, market leader and no corporate governance issues.
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