Strong companies across sectors will keep getting stronger. They will be able to gain market share and attract capital, Ashutosh Bhargava, Head Equity Research and Fund Manager, Nippon India Mutual Fund, says in an interview to Moneycontrol’s Kshitij Anand. Edited excerpts:
Q) The International Monetary Fund’s global outlook is slightly worrying but is not something that is not known. We saw some knee-jerk reaction in equities across the globe and India was no exception amid rising cases of COVID-19. Do you think these factors will cap the upside for Indian markets?
A) After the recent rally, the market looks fairly priced on an aggregate basis. As the economy opens up, we should continue to see a gradual recovery going into the year-end.
As we move closer to FY21-end, the potential for more upside will open up as the market would start to see recovery beyond FY22.
Post the sharp rebound, the market has priced in possible positives. Therefore, one can’t rule out that the market can’t consolidate hereon for a brief period after such strong recovery.
Q) What is the one word you will use to describe the first six months of 2020?
A) Unprecedented. What we have witnessed in 1H20 is unprecedented. We saw a very sharp fall of around 40 percent and since then we have recovered 40 percent.
This has been a truly humbling experience-- you were either a bull or a bear. This crisis is unique as it’s a bottom-up crisis. A health crisis morphed into a full-blown recession. This has never happened at this scale in such a short time.
Then, the response from governments and central banks has not only been swift but gigantic. This monumental easing has led to unprecedented sharp recovery, which has equally caught everyone by surprise.
As we move towards 2HCY20 the uncertainty remains high and the rest of the year should continue to be eventful.
Q) Where do you see markets and earnings in the next six months?
A) The easy money has been made in the last three months. Initially, the recovery was led by defensive like pharma but now in the last four to five weeks, it has broadened into beaten-down cyclical names.
Some hope is back and positives are getting priced in after this sharp rebound. Hereon, investors would see more in terms of rotation between stocks and sectors rather than similar aggregate gains like we saw in the last three months.
A lot will depend on what happens globally in terms of the second wave of infections, US elections, and the general pace of macro recovery. India has recovered in line with the US and other markets and the correlation is at all-time high this year.
Therefore, the 2HCY20 outlook remains dependent as much on global factors as it will be on domestic factors.
Q) In the first six months of the year we have seen plenty of buybacks as well as delistings. What is the reason and will this trend extend into the next six months as well?
A) What we are witnessing is a combination of both large scale equity raising as well as buybacks/delisting by the corporates. There is more precautionary fund-raising by sector leaders than buybacks by others.
It seems Corporate India wants to prepare itself for the contingency where the current crisis takes time to resolve and recovery remains more gradual than expected. Overall, the signals which we are getting from corporate actions are not consistent and slightly confusing.
Q) Which sectors are likely to be leaders and laggards over the next six months?
A) Strong companies across sectors will keep becoming stronger. They will be able to gain market share and attract capital. So, leaders in every small or big sector should be looked at for the next six months and even beyond.
From the medium-term perspective, investors can keep in mind themes like import substitution, privatisation along with strong balance sheets companies.
Q) Many new investors joined the party on D-Street in the first six months but as we enter the second half of the year, which survival tips will you share with them to keep them afloat amid volatility?
A) New investors should understand that returns come with risks. One should not get carried away with initial success in markets. Eventually, returns are a function of buying good growing businesses at a reasonable price.
One should have proper long-term goals and diversify investments across asset classes and sectors, depending on the risk profile. A very strong emotional quotient and long-term orientation are key ingredients for success in the stock market. Young investors should have their expectations right and avoid short cuts.
Q) Gold hit a fresh high in the week gone by. Do you think it can outperform equities in 2020?
A) Given the uncertainties around the world and the kind of expansion of the global monetary base, it won’t be a surprise if gold continues its dream run in the coming months.
Q) Your five stock or sector recommendations to investors for a one-year perspective?
A) In terms of sectors, telecom, utilities, large financials, and pharma may continue to do well in the current environment.
Q) Are quant funds gaining interest? Are investors now savvy about investing in such funds?
A) Since alpha generation, particularly in the large-cap space is getting difficult, a quant fund offers an interesting diversification option to investors. Typically, portfolios of quant funds tend to be different from average diversified funds in the market.
Since investor awareness has significantly improved, the time may be right for such funds to attract informed investors. That said, it’s very early days for such funds in India.
Q) What’s the investment rationale behind the balanced advantage fund that you manage? Who should consider it?
A) The rationale is to provide reasonable long-term returns with much-reduced volatility. It is a system driven approach where a model based on objective parameters like valuations and trend following performs asset allocation job.
Since asset allocation is critical but not easy due to emotional factors, balanced advantage funds come as a good alternative. Particularly for conservative investors, balance advantage funds offer good potential for reasonable risk-adjusted returns.
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.
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