There is no doubt that the COVID-19 would be a major disruptor for several businesses. Estimates vary widely about the extent of the damage but suffice it to say that the damage would be extremely large.
There is no doubt that the COVID-19 would be a major disruptor for several businesses. Estimates vary widely regarding the extent of damage, but it is safe to say that the damage would be extremely large, EA Sundaram, Executive Director & CIO- Equities- o3 Capital, said in an interview with Moneycontrol’s Kshitij Anand.
Q) What is your take on the financial stimulus offered so far by the RBI and government?
A) We believe that the RBI has done what it could. Reverse Repo rate has been reduced by 0.25 percent, there is an Rs 50,000 crore fund for NBFCs, plus a Rs 10,000 crore fund for housing finance companies.
The moratorium on loan repayments for 3 months (during which time the non-payment of EMIs will not be counted as NPAs). We are confident that the reduction of reverse repo rates would encourage lending to the needy sectors. We now await the second round of fiscal stimuli from the finance ministry.
Q) IMF suggests that we could see the Great Depression 2.0. What impact would that have on markets and the economy?
A) There is no doubt that the COVID-19 would be a major disruptor for several businesses. Estimates vary widely regarding the extent of damage, but it is safe to say that the damage would be extremely large.
However, there are a few points worth mentioning here:
(1) Not all businesses would be equally affected. It is highly unlikely that a company engaged in pharmaceuticals (especially chronic therapies) or a company catering to household essentials would be affected to the same extent as a company engaged in travel or tourism.
(2) New business opportunities would emerge from this crisis. Cybersecurity, technologies that promote remote working, vaccines, healthcare, have brighter prospects coming out of the pandemic.
(3) Stimulus from central bankers to continue. Governments around the world would not worry about deficits right now, and it is likely that the focus, whenever the spread of the virus is contained, would be to spend on economic stimuli, including infrastructure spending and job creation.
(4) Bad news was reflected in this fall. The market had corrected 38 percent from the peak in the space of about 40 days. It is likely that a good deal of the bad news was reflected in this fall. As we write this, the market has recovered 22 percent from the recent bottom. It is more than possible that there would further fall because no market sharply recovers in a straight line after such a big fall.
(5) The focus of the investor should be, in our opinion, on strong business models that have a better ability to outlive this problem, low-leverage balance sheets, and more favourable valuations. The last point is more in favour of the investor now than 3 months ago.
Q) March quarter earnings are likely to stay muted but management commentary will be eyed. What are your expectations from India Inc?
A) Our expectations are no different. It is also very possible that the June quarter earnings for India Inc. would be much worse than the March quarter because, in the March quarter, the disruption was only for about 10 days.
At the same time, we expect two distinct set of numbers for the June quarter, with some industries reporting extremely poor results, and others (mainly pharma, healthcare, and consumer staples) reporting better numbers.
The focus would clearly shift to 2021 and beyond.
Q) If we are indeed in a Great Depression-like situation, what is the kind of portfolio that one should work with? Is time to go underweight on equities to conserve capital?
A) Always, proper asset allocation would help. For most investors, a 70:30 or a 60:40 mix of debt: equity would be ideal.
If an investor has chosen to invest his/her equity portion through the SIP route, it is highly recommended that they do not stop the SIPs at this stage.
Even in the case of an investor whose monthly cash flows have been rendered vulnerable due to the COVID-19 crisis, it is better not to stop the equity SIPs altogether.
Such investors can utilize this opportunity to focus on funds that have stronger portfolios (with inputs from their respective financial advisors).
As a rule, it is always advisable to (a) refrain from making a major new equity allocation immediately after a major rise in the market and (b) refrain from reducing the equity allocation immediately after a major fall in the market.
Therefore, we don’t advise going underweight on equities at this point. We, however, would advise investors to stick to strong portfolios (in case of funds) and strong business models (in case of individual stocks). The advice of the respective financial advisors is critical in this matter.
Q) With the economy heading towards near Zero levels – do you think it would make sense to avoid small & midcaps which usually get a booster from the economic activity?
A) Generalizations of this kind are usually not a good idea. Not all midcaps and small caps are equally vulnerable.
There are good niche businesses occupied by the mid and small-cap categories, and these would be less affected by the slowdown. What matters is the type of business we choose to invest in.
Q) Your two mantras for investors which could help them get through the COVID-19 storm?
A) These two mantras are not necessarily applied only to the period of the COVID-19 storm. They are universally applicable at all times.(a) Stick to strong businesses that have the ability to withstand difficult times, and
(b) Don’t pay an exorbitant price, even for the best of companies.
Q) Which sectors are likely to turn out to be leaders and laggards of the next bull run?
A) We don’t know about next bull-run. It would be very premature to talk about it now. But, in the current environment, we are confident, as already stated, that sectors like pharma and healthcare, consumer staples, utilities, and selected technology companies would be less affected compared to companies in travel and tourism-related sectors, automobiles and capital goods sectors.
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