Small-ticket consumer discretionary sector which have corrected can bounce back. Private banks have seen a sharp correction, and insurance companies should continue to see secular growth.
Investors should rebalance their asset allocation. Wherever the equity component goes down due to the fall in the market, investors should increase their equity exposure while maintaining a balanced allocation, and there can be a slight tilt to large-caps at this time, Mahesh Patil, CIO – Equity, Aditya Birla Sun Life AMC, said in an interview with Moneycontrol’s Kshitij Anand.
Edited excerpt:Q) It looks like we have formed a base near the swing low of 7,511. What is your take on the market action?
A) Indian equity markets have fallen 30-35 percent from the recent peak in mid-Feb. This is not just on the account of fundamental reasons but also due to high-intensity selling by foreign investors (FIIs) who have sold more than USD 8 billion in the past few weeks.
The sharp sell-off by FIIs is primarily from Quant funds, Hedge funds, Risk parity funds which had grown massively, some on leverage, when global liquidity was easy.
They had to forcefully unwind their positions amidst the high volatility as the VIX index touched record highs.
Also, global ETF flows indicate that investors are adding to positions in markets such as China, Japan, Korea, where COVID-19 has been seemingly peaked while reducing positions in other markets like India where the uncertainty remains.
DIIs, on the other hand, are mostly long-only and hence they would have deployed excess cash as the markets corrected sharply providing an attractive buying opportunity.
While the policy measures taken by our government and RBI came a bit late, they do provide some comfort to investors.Q) Should investors rejig their asset allocation in these troubled times? If yes, what do you recommend?
A) Yes, investors should rebalance their asset allocation. Wherever the equity component has gone down due to the fall in the market, investors should increase their equity exposure while maintaining a balanced allocation. There can be a slight tilt to large-caps at this time.Q) After registering a series on series fall of more than 25% in March, what is the sense you are getting for the April series?
A) The large sell-off by FIIs due to increased volatility is largely over. Some amount of selling will continue until we see signs of flattening of the virus infection curve.
The domestic institutional investors (DIIs) on the other hand have seen good inflows in this month till date as investors and asset allocation funds move more money to equities seeing the markets at attractive levels.
They are providing some support for the market. However, if the lockdown is prolonged and the impact on the economy is much more severe, the savings will get impacted and the domestic flows could slow down.
This can put further pressure on our markets and we may re-test the recent lows if that happens.
While it is difficult to call a bottom at this point in time, the recent lows of the market should act as good support given that at those levels market fundamentals even on a trailing basis look very compelling.Q) What is your take on the stimulus package which the government announced in the week gone? Also on the measures taken by RBI?
A) The Indian government is tackling the COVID-19 situation in a step-by-step manner. The government has already announced a 21-day lockdown in an attempt to stop the spread of the virus.
They have announced relief measures worth Rs 1.7 lakh crore targeted to the low-income segment. The RBI also reduced rates by 75 bps, announced measures which will enhance liquidity in the system by 3.7 lakh crore, as well as a moratorium on loan and interest payments which should provide relief to a large swath of the population.
Overall, these measures should give some confidence to investors that India should be able to contain the virus sooner rather than later and that the government and RBI are working in a coordinated manner to cushion the impact on the economy.
However, in comparison to other economies like the US, Europe, and China, where a very large stimulus of almost 8-10% of GDP has been announced, we need to do more.
A large fiscal stimulus with targeted measures for various sectors that are bearing the brunt of the slowdown and which provides some relief to MSMEs as well is the need of the hour.Q) Which are the sectors that are likely to get impacted the most positively post the implementation of the stimulus package?
A) With the government announcing various measures to provide financial support to the low-income segment through its stimulus package, consumer staples should continue to see strong demand.
Small-ticket consumer discretionary segment may also do well. Retailing of consumer staples and small-ticket items should also benefit.Q) Any 3-5 stocks which could turn out to be big wealth creators post the COVID-19 led selloff, and stimulus package (approx. 3.2% of GDP according to RBI).
A) Good quality companies in small-ticket consumer discretionary sector which have corrected can bounce back. The demand destruction they have seen is temporary and they can see long term growth due to low penetration and rising per-capita income.
Private banks have seen a sharp correction but those with a strong liability franchise and high-quality assets may gain market share. Also, insurance companies should continue to see secular growth.Q) What is the checklist which investors should follow in a bearish scenario?
A) In a bearish scenario, sector leaders with relatively stronger balance sheets, higher earnings visibility, strong cash flows, and management with a good track record should be preferred. Investors should avoid companies with high leverage.
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