It's difficult to speculate what will be the specific measures from the government, but a fiscal stimulus of 1.5-2 percent of GDP is required in the current situation, Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance Company said in an interview to Moneycontrol's Sunil Shankar Matkar.
Edited excerpt:
Q: At a time when the market is bleeding, what are your suggestions to your clients?
As we know, it is difficult to predict or time the market bottoms and tops accurately. We could still see some short-term volatility in markets as the coronavirus cases continue to escalate.
However, with this sharp correction in markets, valuations have become quite attractive, as indicated by various valuation indicators. This presents some buying opportunity for long term investors, and we suggest investors to gradually start deploying in equities (as per their risk profile).
Historical data has shown that investments made in challenging times have been quite rewarding for investors over the medium to long term.
The prudent thing is to at least get started, or not to panic and sell-off. If someone is panicking and exiting now, they may be making their losses permanent (by booking them)—which is not advisable.
Q: FIIs net sold over Rs 1 lakh crore in equity and debt in March so far, which seems to be the highest monthly outflow. Do you expect the more FII outflow in the coming weeks or will they start pouring in again due to attractive valuations?
During periods of risk aversion, emerging markets (including India) see FPI outflows, and that is what we are witnessing right now. It is difficult to predict the quantum of FPI outflows, but outflows so far in 2020 have been much lower than that during the global financial crisis of 2008-09 (but it should also be noted than it's just been only a couple of months in this correction). The FPI flows and trajectory will depend on how the coronavirus pandemic pans out, and how long the global risk aversion continues—and is, therefore, a developing situation.
Q: The market fell drastically in the past one month as COVID-19 has been spreading widely in Europe and the United States, which investors worried the most? What are your thoughts and what is the way ahead for the market?
As we know, a complete lockdown has been announced pan-India for a 21-day period. Though this should be beneficial in controlling the coronavirus outbreak in India, we will have to see how it pans out. Also, the lockdown will hamper economic activity in the short-term, and we will have to see how long the lockdown continues - and its impact on economic growth. We have already seen a sharp correction in markets, but its difficult (and maybe futile) to predict whether we have reached a bottom or may see further correction. However, as mentioned before, market valuations are quite attractive now, and we suggest investors to gradually start deploying money in equities.
Q: All stocks/sectors turn more attractive in terms of valuations now. Have you started accumulating? What are those sectors which can create great value in next couple of years, what is your pecking order and why?
Yes, we have started to accumulate gradually. From a sectoral perspective, with financials seeing a healthy correction in this fall, valuations for certain private financials look quite attractive at this juncture. Other sectors we prefer at this point are FMCG and pharma.
Q: Earlier the economic and earnings recovery was expected to start in second half of FY21. But now most of experts started talking about FY22 for recovery. What are your thoughts and how much damage (approximately) do you expect in earnings and economic growth in Q4, FY20 and FY21?
We are likely to see downward revisions to corporate earnings, and a further slowdown in economic growth in FY21, but the quantum of downgrade will depend on how long the pandemic (and lockdown) continues. So, it's still a developing situation, and clarity will emerge in a few months.
Q: As Finance Minister recently said they are working on stimulus given the shutdown across the country to limit virus cases. What could be included in fiscal stimulus?
It's difficult to speculate what will be the specific measures from the government, but a fiscal stimulus of 1.5-2 percent of GDP is required in the current situation. During the global financial crisis, we have seen the central fiscal deficit expanded from 3.4 percent of GDP in FY07 to 6.1 percent in FY09 and 6.6 percent in FY10 — so that was quite a large and extended fiscal stimulus.
Q: Do you feel the government has a major relief in fiscal deficit due to more than 50 percent fall in oil prices globally, when it is finding hard to meet divestment target which reduced to Rs 65,000 crore from over Rs 1 lakh crore?
The sharp fall in crude oil prices will help us on the current account deficit, as India is a large net oil importer. India imports around 1.3 billion barrels of crude every year, so a $20 per barrel fall in crude price will result in an annual savings of around $26 billion. This will in turn help to reduce our current account deficit. Market estimates indicate that a $10 per barrel fall in crude price helps to reduce current account deficit by around 40 bps (0.4 percent).
The high divestment target of Rs 2.1 lakh crore budgeted for FY21 seems challenging, considering the current market conditions. But we will have to see how the pandemic pans out and if market conditions improve going forward.
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