Midcaps, select smallcaps should get priority in portfolio now, says Joseph Thomas of Emkay Wealth

The second wave of the pandemic has just started. It has adversely affected life and business in some of the major cities of the country. It may be a bit too early to look at the extent of the impact of this on the economy. The impact could be of a much smaller magnitude compared to the last time as we already have the experience gained out of combating the first wave, and also some amount of success with the mass vaccination programme, so far. Another factor that we need to consider is the degree of lockdown or shutdown that we may go in for. A complete shutdown will destroy demand, output and employment like it happened the last time. But this time around it may not be that strong by all reasonable assessments. So, it depends on several factors around the pandemic and the action taken. A lockdown will definitely have some impact on corporate profitability and earnings but again, the impact will vary from industry to industry.

Given the rising coronavirus risk in India, have you changed your investment strategy?

There is no major modification required as far as the investment strategy is concerned but we need to be more realistic in our approach. We need to be clear on the sectoral preferences and also market capitalisation. As far as the sectoral performance is concerned, the sectors which had actually done well in terms of the performance like pharma and healthcare, technology, private banks and select larger NBFCs and some from the consumer segment, apart from agri and specialty chemicals should be in the consideration. A relatively weaker rupee is likely to aid some of the companies in the exports segment.

It is also worth mentioning that the production linked incentive (PLI) Scheme introduced by the government in the aftermath of the first wave will go a long way in helping corporates in some of the sectors, which have received support to hold up well against all immediate odds, like food- processing, telecom, electronics, textiles, specialty steel, automobiles and auto components, solar photo-voltaic modules, and white goods such as air conditioners and LEDs etc.

The twin objectives of replacing China as a supplier for other destinations and also substituting Chinese imports in some critical areas is going to help some of the sectors in the PLI in the long run. Most of this is work done against the background of the last wave, and this is definitely going to help. This may also give some opportunities for sectoral rotation.

As far as the choice of the segment goes, the midcap segment and to some extent select smallcaps should get priority in the scheme of allocation, and carefully chosen midcap funds may be the better vehicles for entering the market. The importance of systematic investments over a period of six to 12 months should be a worthwhile approach to building investment portfolios during this phase.

The economy has started showing signs of improvement in CY21. Will the coronavirus wave hit growth?

The economy has been in a process of revival since Q3 of FY21. There have been several factors which facilitated this. The continuation of the fiscal and monetary initiatives through FY22 is critical to sustaining this recovery, and more so in the face of the resurgence in the pandemic. The RBI is likely to continue with its accommodative stance, which it may not dilute at this point of time, due to the changing ground conditions. This despite the uptick in inflation and the rise in bond yields in developed markets in the last two months. While inflation could moderate due to changing demand conditions consequent to the widespread lockdown, there is a respite in the upward movement in bond yields in the recent past. There has not been any significant growth in credit, so far, though the manufacturing and services PMI readings were better-than-expected.

The consistently accommodative and pro-growth stance of the RBI will be the single determinant factor as far as the market's ability to withstand any external shocks is concerned. Because the response from corporates would also be open and measured to the extent the support from the system is going to be in case of major developments. At the same time, any deceleration in GDP growth, and a fall in output and employment, may affect the earnings estimates for the coming quarters specifically because the markets have been pricing in a significant amount of sunshine after the drastic fall seen in the first two quarters of the last year.

The rupee has started weakening again against the US dollar. Do you think one should invest in export-related sectors?

The rupee had shown a tendency to strengthen on account of two factors, the large inflows from FPIs and FDIs and the fall in imports during and in the aftermath of the pandemic. The situation was not going to continue like that as India being a growing economy was going back to the position of a net importer. Therefore, we see the rupee gradually weakening against the dollar. In the immediate term, all currency majors are likely to remain weak against the dollar and the rupee is no exception. With rupee depreciation, companies which export goods or services are likely to have better realisations. This is just a helpful or supportive factor. Only to the extent of the unhedged portion of the export receivables the benefit would accrue, and the other hygiene factors while selecting the business to invest, should be adhered to. Exporters benefit from a gradually weakening rupee.

After a 70 percent rally in FY21 on a low base, what is your outlook on markets for FY22?

One thing that we need to bring into our calculations is that the year that has just gone by was an unusual one in which we had seen a major fall in the markets and a subsequent revival and rally. This accounts for the stunning returns that we see for that period. It is less likely that such superlative performance gets repeated frequently. Therefore, one needs to moderate one's expectations of investment returns in the light of these factors.

Considering the current environment, should one stick to equity for investment or look at other asset classes?

This question is relevant at all times, not particularly at this time. Investments should be done after risk profiling and an asset allocation, which is in alignment with the basic risk profile. When this is done, it is only natural that you may have a multi-asset class portfolio but this allocation differs from individual to individual. Even in equities, one may have the choice of local funds versus international funds and also a choice between large and mid-cap funds and thematic or sector funds. To add to this, as you may be aware interest rates have been quite low in the last one year or so, and the returns from fixed income will be much lower than what they were in the last two or three years.

Yet another asset class, gold, has done quite well in the last couple of years. With the uncertainties subsided and the US interest rates having started moving up, gold is currently in a narrow range. Only in the event of the pandemic destroying demand and employment like it did last time, the probability of which is quite low and global inflation rising, gold may be able to come back in a big way. Despite all this, it is the most appropriate thing to have in the traditional asset classes—equity and debt—and some amounts of alternate assets.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.