'Market looks frothy but value stocks may outperform growth ones in short term'

Valuations are expensive as earnings expectations have been lowered. The GDP growth for FY21 will be -5 percent to -7 percent and FY22 growth will just about bring the GDP to FY20 levels," Mihir Vora, Director & Chief Investment Officer, Max Life Insurance tells Moneycontrol's Sunil Shankar Matkar in an interview. Edited excerpts:

Q: The market has rallied 37 percent from its March lows and 17 percent in the last one month. Do you think the market is ready for a significant rally amid hopes that we are moving towards normalcy in July? Will the economy emerge stronger in FY22?

The last 1,000-point rally in the Nifty50 has been quite surprising as the market went up despite significant supply of stock by promoters and companies issuing new equity. While the foreign investors purchase number looks healthy, a large part of the purchases has been through block deals, offer for sale and QIB placement of shares. Moreover, the share of institutional volume in the daily turnover has also reduced–it means that retail participation has been an important factor.
Many segments of the economy may face reduced demand for quite some time even after normalcy returns. We don't know the secondary and tertiary impact of the lockdown-induced slowdown on small businesses, employment and consumption patterns and change in consumer psychology.
Moreover, India has used very minimal fiscal measures to stimulate growth. While many developed countries have introduced fiscal stimulus of 5-15 percent of GDP, India has done only about 1 percent so far, given the fiscal situation. Even before the pandemic, India had growth issues, so a V-shaped recovery for India is unlikely and getting to over 7 percent growth rate on a normalised base will take a couple of years.
It should also be remembered that the sentiment has turned because of policy actions by the US Federal Reserve, the European Central Bank and Bank of Japan. These have unleashed unprecedented amounts of liquidity into the global financial markets which has lifted all asset prices. The markets need such strong support to continue. Any perception that the central banks are reducing the liquidity spigot will have sharp negative reactions in the market.
Thus, the market looks a bit frothy given the current fundamentals. Valuations are expensive as earnings expectations have been lowered. GDP growth for FY21 will be -5 percent to -7 percent and FY22 growth will just about bring the GDP to FY20 levels.

Vaccines will take at least a few quarters to be approved and commercialised. Manufacturing in large quantities will also take time before which maybe large parts of the world would have achieved herd immunity by default or design. Events on the border may also create volatility from time to time and the benign stance of global central banks needs to continue for our markets to sustain.

Q: The rally has not been restricted to largecaps but midcaps and smallcaps have done well too. Does it mean that the worst is behind us or is it just a catch-up with largecaps?

Midcaps and smallcaps were bombed out to start with. They had underperformed largecaps by almost 30 percent since January 2018, so some catch-up is to be expected. However, even now the underperformance is stark. It also shows retail participation in the past few months. If the market stabilises at these levels and the growth uncertainty reduces, mid and smallcaps may still outperform. However, it needs a benign environment.

Q: What should be the strategy now that the market has rallied 37 percent from March lows but is still 20 percent away from its record high? What are the sectors that should be added to the portfolio and the ones that should not be touched?

There's still scope for selective stockpicking. Even within the largecaps there are many stocks and segments which have lagged, are cheap and may pick up as the growth uncertainty fades away. Some of the themes which have traction are rural economy doing better than urban. This makes the case for segments like paints, FMCG, motorcycles, cement etc. Make-in-India theme is getting traction due to the China issue and exporters and outward-facing sectors may do better as the recovery in the US and Europe may be more immediate compared to India due to the large fiscal measures by these countries. Thus, pharmaceuticals, chemicals, IT software, auto ancillaries may do well.

Value stocks may outperform growth stocks in the short-term. Segments that will remain under stress for a longer time are hotels, restaurants, malls, airlines, multiplexes, and highly discretionary spending.

Q: Fitch Ratings recently said the government may be thinking of another fiscal package. What should be these new measures?

Given the limited fiscal stimulus, so far, there is scope for future action. The corporate sector, especially the medium and small enterprises, self-employed and small businesses have been the worst hit. Lower interest rates and increased credit is unlikely to solve the problems.

We need direct support to businesses in the form of subsidies, grants or compensation for labour and other fixed costs borne during the lockdown. PSU banks need to be encouraged to lend more, which, in turn, requires the government to capitalise them quickly. Tariff and non-tariff barriers for imports need to be stricter. Further support for 'Make in India' and a new SEZ policy are needed to kick-start growth.

Q: How has Max Life's fund performance been? What is the investment strategy?
At Max Life Insurance, overall prudence across all the asset classes has helped us gain leadership across our funds in the previous year where out of our nine active funds, Morning Star has rated seven of our funds 5-star or 4-star and two are rated 3-star. Our investment performance last year was the result of outperformance in all three attributes of fund performance ie asset-class performance, sector selection and stock selection. Most of our funds have done well versus the benchmark and peers in one-year to 5-year timeframe.
In equities, our strategy is to focus on quality companies with our GARP (Growth At Reasonable Price) philosophy. For fixed income, we prefer duration management compared to credit risk. Moreover, for fixed income, we follow different investment strategies for Traditional and Unit Linked Schemes (ULIP) in that for Traditional Funds, Asset Liability Management is the key driver for our investment decisions and for ULIP, the objective is to invest in line with our view on the interest rates.

Even in the volatile environment and current uncertainty, one can still find and invest in good quality businesses. So, one part of our strategy is to continue our bottom-up stock picking using our investment philosophy and the second part of the strategy is to continue to take tactical calls based on emerging data points in a post-COVID world.

Q: What kind of mutual funds should a conservative investor and an aggressive investor choose?
The most important decision is asset allocation. Equity, bonds, gold, alternate investment funds (AIF) and real estate should all form a part of an investor's portfolio. Equity Funds, AIF are the higher-risk, higher-return part of the portfolio. Gold, bonds and commercial real estate are the relatively more stable parts. The proportion of these depends on the financial profile and the psychological profile of the investors – these profiles define the risk-appetite. Within the asset class, one can look at a combination of funds viz. large, mid, small, thematic etc.

The important thing to look at while selecting funds is the clarity of investment approach and transparency. As long as the fund manager has a well-defined policy and process, the chances of nasty surprises are limited. The fund manager’s communication with investors is also an important factor.

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