In an interview with Moneycontrol, Navneet Munot said SBI MF is anxiously excited as it scouts for winners amidst the chaos
With coronavirus causing immense uncertainty on future market movements, SBI Mutual prefers to invest in companies that are ready to reimagine their business processes, said Navneet Munot, Executive Director & Chief Investment Officer, SBI Mutual Fund.
In an interview with Moneycontrol, Munot said: “On equities, we are anxiously excited as we scout for winners amidst this chaos. Winners will be the firms that stand ready to rethink and reimagine their business processes.”
He was quick to add that agility and nimbleness will matter more than size. He feels innovation and R&D will create lasting competitive advantage and not the scale of physical assets.
Munot said planning will help, but more important will be creating strong feedback loops to prepare for unknown-unknowns.
Risk management will also evolve to account for black swans and also newer risk areas such as cybersecurity. He also said scouting for talent will be important, as will be re-skilling and holistic well-being of employees amidst the new work regime.
Treating all stakeholders fairly amidst the crisis will be vital in building trust, that in turn will help create long-term value, Munot said.
Corporate profits as a proportion of GDP have been dwindling for almost a decade now. Large profit pools are necessary to fund investments leading to employment and income generation.
At a time when innovation and technology are key differentiators, these profit pools are critical to funding R&D.
Munot believes the aspiration to play a prominent role in the global supply chain requires pro-business policies that incentivise creating organizations of size and scale that can compete in the global marketplace.
With a deadly mix of issues ranging from a pandemic, a country-wide migrant crisis, locust attacks, cyclones, earthquakes, border tensions with neighbours, a ratings' downgrade, all coming together, India’s resolve is being tested, he said.
"Adding to the macro issues, disruption is becoming a norm be it around consumer behaviour, technology, policy, geopolitics, supply chains, and so on. The response can be either to hope for normalcy to return or to seek opportunity in this apparent chaos. Firms that take the latter approach are likely to survive and thrive, " he said.
As we navigate this period of heightened uncertainty, market gyrations will likely continue. "Investors who identify these winners and have the patience to stay invested should end up reaping rewards in the medium term,” he said.
He noted domestic equity markets had been an underperformer within the emerging market complex in this crisis.
“Even though an environment of dollar strength and commodity weakness is usually associated with its relative outperformance given low dollar debt, high forex reserves and net imports of commodities but still the rising number of COVID cases, concerns on the financial sector and lesser fiscal support all contributed to this weak performance,” he said.
The country is already in a prolonged slowdown as underscored by the recent GDP print. The technical aspect of high weightage of financials in the index also weighed on relative performance.
However, recent signs of the economy opening up have led to a sharp rally for Indian equities helping reverse some of the underperformance, Munot believes.
The government announced a slew of stimulus and reform measures in a bid to seize the crisis as an opportunity and fight for a position of strength in the changed world order, he said.
“Overall, it prioritised structural supply-side reform over near-term demand boost. Reforms in the farm sector were encouraging and should help address the two key challenges of price discovery and value addition. Also encouraging was the intent for reforms around factors of production- land, labour, capital, and enterprise. However much more needs to be done on this front, especially on the last one – enterprise,” Munot said.
He believes, judicial, administrative, and regulatory reforms are needed to align the machinery for India’s growth aspiration; accountability and efficiency must go hand in hand without compromising one for the other.
“We must leverage data and technology to accelerate our transformation. The thrust on uplifting the masses must continue as strong social capital is vital to fulfil our aspirations as a nation. The current migrant crisis needs to be carefully handled. Rehabilitating them is important, and so is keeping the rural economy insulated from Covid, as it has remained amongst the only bright spots so far,” Munot said.
Another thrust of the stimulus announcement was to revive the credit engine through credit guarantee support to MSMEs and to some extent NBFCs.
Munot feels this should help better transmission and allow money multiplier to kick in. Similarly, the focus on NREGA is welcome given its high multiplier impact.
“We believe this is one of the most productive ways of boosting aggregate demand and should be significantly scaled up. In the same vein, allowing additional borrowing by states with conditionality attached on reforms is in the spirit of cooperative federalism and makes immense sense given the higher multiplier of state spends,” Munot said.
The Reserve Bank of India will have to undertake calibrated monetisation of additional borrowings.
On its part, it has been aggressive on rates, liquidity, and transmission. Yet, the current yield curve is one of the steepest in India’s history, Munot said.
Given the sharp jump in the quantum of bond supply (both G-sec and State Development Loans), the market would be keenly watching the actions of central bank in creating additional demand avenues including open market operations.
“Additionally, further relaxations may be needed for greater flexibility to lenders on one-time restructuring. Hasten to add, while this is the crying need of the hour, we must keep an eye on hard-earned gains on the credit culture across all segments. It is our collective responsibility,” Munot said,Speaking about the fund house’s strategy on the fixed income side, Munot said: “We have been maintaining a relatively high duration in fixed income funds. While structural view remains unchanged, we will take advantage of tactical opportunities as we expect the bond market to be in a consolidation mode for the time being. Credit spreads are elevated, but they also reflect the economic uncertainty and constraints in the financial system and therefore we stay selective.”