'Reforms in land, labour and law may help to drive investments in India'

The RBI and government had already announced a slew of measures, which along with the measures announced on Wednesday, account for around 70 percent of the proposed total Rs 20 trillion or 10 percent of GDP.

The measures focussed very appropriately on the last-mile liquidity issues, especially for MSMEs and also discoms. I believe that the government has provided for the stimulus in a fairly macro-prudent manner.

With lots of liquidity and low-interest rates, measures such as providing credit guarantees should help in preventing insolvency and sharp unemployment. The measures should assist the financial sector.

The reforms on land, labour and law are still awaited. These might be beneficial to drive overall investments in the economy and should have the highest multiplier-effect albeit in the medium-term.

The government’s enhanced borrowing programme suggests an additional 2 percent deficit and under the circumstances, it is very important that the quality of this additional expenditure is done in the most productive manner. So far, the measures undertaken by the government are very appropriate.

Q) We are just two months into a bear market and expecting a bottom (at 7,500) may be too optimistic. Do you think we could be looking at another leg of downswing before we stabilise?

A) I do not have any specific view of how the markets will believe in the short term. The short term might see some more volatility but also more consolidation.

However, the peak surge we saw in risk readings in the last fortnight of March is unlikely to repeat itself.

Q) What is your worst fear for post-COVID-19 world? Do you think the investment climate will change? Will investors get more cautious about equities (we saw after the 2008 crisis)?

A) While the short-term collapse in GDP and corporate earnings is a given, the worry is on the structural damage caused along with the nature of recovery that will unfold on the other side.

What is uncertain, at this point, is how effectively all the government measures and the inherent diversity of the economy can prevent major credit issues, bankruptcies and layoffs.

My hope is that we overcome this pandemic with as minimal damage as possible. Sectors such as hotels, travel and tourism will definitely be hit for a while.

After the current risk levels normalise and on account of the huge liquidity created by global central banks, I eventually expect global money to start relooking at markets such as India. Thus, when the dust settles, global investors should be looking at equities as in the past.
Q) If someone plans to construct a portfolio, what should be the ideal allocation and why?

A) An ideal portfolio should have strong well-run business models. Ideally, the portfolio should be spread across sectors and industries, which represent the complete potential of the India opportunity.

Typically, firms should be addressing large-sized opportunities. Fortunately, given the low level of per capita penetration across most goods and services in the country, it is possible to build a diverse and robust portfolio of such good businesses.

Strong businesses are the first line of defence in weak periods and prevent permanent destruction of capital.

The strength of such businesses emerges from a combination of better market share, brand positioning/pricing power, technology, distribution, after-sales service, management, balance sheet, industry structure, etc.

We prefer such firms not only for the better ability to withstand economic vulnerabilities but also because many of them emerge even stronger-- gaining and consolidating market share from weaker firms during weak periods.

Q) The Nifty50 is still trading at a premium compared to its historical averages but earnings are likely to take a hit in the coming quarters. What are your views?

A) The near-term earnings growth will not mean much as everything is disrupted and dislocated. Eventually, we will have to rely more on the long-term earning power of a business to judge its attractiveness at the current market price.

The near-term weakness in earnings will detract from the fair value probably by a magnitude much lower than the correction in some of the stock prices.

However, on quick reference valuation measures such as price to historic book, markets are still at a strong discount to average levels over the last one and two decades.

Even on the historical price to earnings basis, the markets are not overvalued. On the other hand, looking at valuations on the basis of historical earnings might have been appropriate if recent earnings were normal.

We know that recent earnings have been impacted by the big clean-up in the banking sector and slowdown in the automobile and telecom space.

Q) Warren Buffett gave another important lesson to investors – how to cut losses and preserve cash. What are your views?

A) I believe this is a very important but difficult trait for an investor to have. It is important to set emotions and attachments aside and cut losses when the situation demands.

This all the more important when underlying assumptions on business economics have deteriorated fundamentally. Thus, Buffet has cut all his airline positions at a loss, given the changing dynamics and the oversupply he sees even post-COVID normalisation.

Q) Buffett is sitting on a pile of cash and is not investing at a time when markets are witnessing selling pressure. Does it mean there is more downside and investors should have more cash in hand?

A) Warren Buffet continuing with high levels of cash, including during the pandemic, could be for a combination of reasons. These could include amongst others: 1) US authorities announced a rescue package very early in the crisis–so distress levels did not shoot up or prolong, restricting creation of attractive opportunities 2) markets have rebounded very quickly offering a limited window  3) valuation levels in the US market relative to growth for stocks of his interest (typically large deals) might not have become compelling enough and 4) there are various scenarios which can unfold in the quarters ahead and he wants to be prepared for any of his own worst-case downside scenarios.

An investor should, depending on his risk profile, have an appropriate asset-allocation plan (including debt). This should be reviewed at a reasonable interval and adjusted back to the desired level if one asset class has been very volatile and allocation percentages have changed materially.

But, since there can be more volatility in equities and remain so for an uncertain period, an investor can choose tactic while rebalancing.

A staggered approach into equities might be fine in the current circumstances. Those investing through the SIP route should continue with that.

Q) Historically, markets have rebounded the most in three-six months after sharp corrections. Barring the tech meltdown of 2000, markets have delivered positive returns in the subsequent 12-month period.

A) Yes, it has been said that history does not repeat itself, but it surely rhymes. A rebound is a function of underlying conditions before the period of correction.

It is also influenced by the nature and appropriateness of policy actions during the downturn.  Fortunately, I believe going into the pandemic there was no bubble, banking sector crisis or exuberance in the Indian system.

Any of these issues along with the pandemic would have further delayed the recovery beyond the time it will take on account a pandemic hit only.

Q) On average, it takes about 156 days from a peak to a trough–the lowest has been 35 days in 2006 and the highest 410 days during Nov’10-Dec’11. When do you see Indian markets returning to a bull phase?

A) The period required to re-emerge from the trough is typically 3x the time it takes to move from the peak to the trough.

For markets, to move beyond the earlier highs is still far away. I expect the market to consolidate and watch for strength in corporate operational performance from 2Q onwards.

The emergence from the trough will be determined on how the COVID-19 pandemic plays out and the appropriateness of policy response. COVID-19 could remain highly contagious, re-emerge in another season, etc.

When economic activity resumes the extent of structural damage, if any, caused to segments of the economy will all have a bearing on the nature and strength of the recovery. As things stand I expect only a gradual revival in economic activity spread through the course of the year.

Q) India has a long way to catch up with China but it must act now. Which are the companies that are likely to emerge as big winners from Trade War 2.0?

A) There has been progress on this front but more has to be done and sooner the better. Over the last three-four years, India moved up considerably in the ease of doing business from a lowly 134th global rank to 63rd last year.

India still scores very poorly and can definitely improve on the criterion of enforcing contracts and registering property. Just before the crisis, India had reduced corporate tax rates on fresh investments down to 15%. This is competitive by all global benchmarks.

The state and central governments have been trying to facilitate the creation of land-bank parcels for new investments. Additionally, on matters of labour reforms (being a state subject), different states have been relaxing laws to provide the requisite flexibility to attract investments.

On the manufacturing side, India has a strong global competitive positioning in the chemicals, specialty/agrochemicals and pharmaceutical industry.

I expect these industries to continue to do well. Additionally, there might be scope for some scale-up in the global market share in the automobiles and electronics segment as well.

Q) Two or three stocks that you will recommend from two-three year perspective?

A) We have a positive bias for names in sectors such as insurance, healthcare, chemicals, consumption category – select staples and discretionary businesses, select utilities and banks.

All categories where the underlying market exists (even if temporarily disrupted), demand-pull is strong(low penetration, etc) will eventually see a revival. Better run businesses within these sectors could benefit more.

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.