We are positive on personal mobility like 2-wheeler and passenger car companies since we expect consumers to prefer personal transportation over public transport.
India due to its medium-term growth potential and favourable demographics will remain in the allocation radar of most foreign investors, said Sudhakar Shanbhag, Chief Investment Officer at Kotak Mahindra Life Insurance Company in an interview to Moneycontrol's Sunil Shankar Matkar.
Q: With a strong recovery from March lows, some experts now feel that we are in bull phase. Do you share those thoughts?
Equity markets have discounted no growth or earnings increase during FY21 and are now focussed on FY22 & FY23. If we look at FII data over the last three years we saw about Rs 54,000 crore inflow in 2017, about Rs 34,000 crore outflow in 2018 and Rs 82,000 crore inflow during 2019. YTD number for CY 2020 is a negative Rs 21,000 crore where we saw a huge outflow in March 2020 and during May & June we have seen inflows.
If we look at economic outlook for the world it's in the negative territory for most countries from a less than 3 percent growth expected pre-COVID. India due to its medium term growth potential and favourable demographics will remain in the allocation radar of most foreign investors who are looking for such opportunities.
There is no reason to believe that this focus in India is going to change materially since COVID has impacted the world and not India alone. Also, domestic retail investors have kept their faith in equity during these volatile times which will help.
Q: Benchmark indices as well as broader markets seem to be going hand-in-hand in the rally which we have been seeing for a month now. So what is the market pricing in exactly now when everyone is saying that the first half of FY21 is going to be bad in terms earnings and economic growth and COVID cases are also on a rise?
Retail participation in markets has been on the rise through mutual funds and over the last three months more specifically in the direct mode. The number of demat accounts being opened during this period has also been in news. Typically retail investors are more focused on the stocks in the broader markets and this may be one of the reasons of the market performance.
However, retail investors should be cautious on the quality of stocks they are picking and not rely on price movement or non-researched advice while making investments.
Q: Given the rally across equity segments so far and challenges going ahead, where would you invest your incremental money now?
With regards to selection of stocks across market caps from a retail investor perspective for example, the focus has to be on a balanced allocation to each of them across market cycles and based on the risk appetite as well as horizon of investments. Small and midcaps can add good value to a portfolio if we can give it time as well as are willing to withstand a little higher volatility compared to largecaps.
When the economy recovers all stocks will participate but the smaller companies may be in a better position to deliver. However here stock selection is going to be key across these stocks and sectors. Also, as observed in the past a lower interest rate environment supports the smaller companies relatively more than the larger ones.
Q: Which sectors seem to be more resilient in terms of growth during the lockdown?
Sector focus will change as and when there are improvements in the cure / vaccine for the virus. Having said that at the current stage we are focussed on companies which have a strong balance sheet & free cash flows generation, less financial leverage and flexible cost structures.
Specifically, we are currently focussed on speciality chemicals based on expectations of production shifts from China and since Indian companies have strong knowledge and experience on chemistry; Insurance due to increased savings pool, low capital requirement from market and no asset quality issues unlike banks; Pharma due to low regulatory challenges from USFDA and stable growth outlook; and Cement due to focus on housing and infrastructure.
Q: India Ratings believes that there could be additional around Rs 1.6 lakh crore of debt turning delinquent during FY21-FY22 which is over and above the Rs 2.54 lakh crore anticipated prior to the onset of pandemic, taking the cumulative quantum to Rs 4.21 lakh crore. But look at the rally in banking and financials in last one month and from March lows. What is driving this rally?
If we look at the equity indices, banking and financial services have a weight of about 33-34 percent of the total. In light of the expected slowdown and impact of the non-performing assets of banks due to the various measures including moratoriums announced by RBI, the hardest hit during the correction was this sector and hence a rebound when markets recover is but obvious since some of the stocks are available at below average valuations.
Also, as discussed earlier, the equity markets have kind of discounted that FY21 growth and earnings will be tepid and seem to be now focussing on what is expected in FY22 & FY23. A solution to the virus whether in terms of a cure or a vaccine is being expected in about 12 months and hence the expectation is that things will turn around post that. BFSI is a large sector and will always remain in focus.
Q: Auto was one of reasons for rally in the market as experts feel two-wheeler and tractors sales in June was better. What is your take on auto space and should one invest in auto space now?
We are positive on personal mobility like 2-wheeler and passenger car companies since we expect consumers to prefer personal transportation over public transport. Rural India seems to be less impacted by lockdown and farm incomes are expected to be better which makes us positive on tractor demand. As far as commercial vehicles are concerned, there is overcapacity in transport sector and finance availability is also a constraint. Longer term competition from railways is also a threat and hence we are negative on commercial vehicles.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.