Joseph Thomas advises investors to not try to time the market and maintain a balanced approach based on their risk appetite.
The market has corrected quite a bit and it is prudent to start investing in tranches or in a phased manner over the next three to four months. But, keep a horizon of three to five years or what is consistent with your long-term portfolio objectives and financial goals, Joseph Thomas, Head Research - Emkay Wealth Management, says in an exclusive interview to Moneycontrol's Sunil Shankar Matkar.
Q: Do you think the market will be ruffled by the increase in fiscal deficit following the measures taken by the government to revive the economy?
A: The fiscal deficit is definitely an important variable which the market looks at to see how well poised are the government’s finances. More than absolute fiscal deficit levels, what is relevant is the government's intent and ability to follow the glide path it has set for itself. Any major deviation from the glide path is a negative development.
But the market is very patient. We need to wait and see the second half of FY20 borrowing programme, how it is ordered and also whether there is a component of overseas borrowings in it, etc. This assumes greater importance against the background of the recent cut in the corporate tax rates and the consequent reduction in the estimated revenues. It is highly likely that the government may mop up funds through further dividends from the RBI, sale of stake in public sector enterprises, etc.
But we need to allow some time, as the developments over the coming two or three months would determine the direction which government finances would take. These developments will have consequences for interest rates as well as the sovereign rating.
Q: What more do you expect from the government to revive economic growth, sentiment at FII desk and re-rating of the equity market?
A: The corporate tax rate cut impacts mainly the investment side, as the corporates will have a little more money with them on account of the rate cut. So, this is a supply-side development. In times of economic sluggishness like this, probably a more effective mechanism would be to stimulate demand.
For example, a cut in income tax will stimulate demand. It is felt that the government may introduce some more measures which may have a direct positive impact on demand-side because a low level of aggregate demand can be spurred only by specific demand-centric tools and actions.
Q: Is this is the right time to buy midcaps and smallcaps, especially after the government’s move?
A: After the recent fall in the market, the midcaps and smallcaps are looking relatively cheaper to buy. It is a fact of experience that one may not be able to time the investments in such a way that the buying is effected at the lowest levels. Since the markets have corrected quite a bit, it is prudent to start investing in tranches or in a phased manner spread over the coming three or four months.
It is suggested that one should look at two or three good funds, mutual funds schemes or PMS, which have a good track record of consistency in performance. When it comes to smallcaps, make sure that the exposure is taken partly in a large AUM scheme and in a small AUM fund. It is also important that in smallcap funds, a target rate of return be kept in mind for exit at the most appropriate time.
Q: What is your advice to those investors who missed the massive rally?
A: Nobody has missed any opportunity. You may start investing today in the mode and manner suggested above. But keep a horizon of three to five years or what is consistent with your long-term portfolio objectives and financial goals.
Q: A lot of consumer-focussed companies expect double-digit earnings growth and good festive demand, do you think the worst of the slowdown is over or you’ll wait for a couple of quarters more?
A: Yes, we do expect consumer-focused companies to do well from here on. There are a couple of reasons for these expectations, firstly, most of the consumer-focussed companies have a high effective tax rate of more than 30 percent, with corporate tax rates being cut, these companies will have higher space available to perk-up their advertisement and promotional spends. Secondly, as the monsoon season has recovered satisfactorily from the worrying signs displayed during the month of June, the rural demand should remain buoyant. Consumer-facing companies should see growth improving from here on.
Q: Before the sharp rally, a lot of portfolios were bleeding and midcaps were sharply underperforming. What kind of mistakes investor should not make in such fresh phase of a bull market?
A: Not only for the current upmove in the equity markets but during any phase of the cycle, investors should avoid the key mistake of timing the markets. Now there are two ways the investors try and time the markets. Either they would try to time their entry and exits points and/or go overweight on certain segments of the market which they expect will do well.
For example, it was seen investors’ allocation getting skewed towards mid and smallcap stocks during the rally of 2017, mostly based on historical returns. The portfolios invested heavily in a particular segment suffer outsized losses when the cycle turns. We would advise investors to not try to time the markets and invest based on investment horizon, and maintain a balanced approach based on risk appetite.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.The Great Diwali Discount!
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