Much of the market’s recovery depends on how soon the domestic economic turnaround starts, delayed and hurt as it is by the Coronavirus epidemic, feels Axis Mutual Fund’s Head of Equity, Jinesh Gopani. He spoke to Moneycontrol’s Venkatasubramanian on a host of issues, including the problem of a narrowly-led rally with very few stocks participating, value opportunities in the mid-cap space and the high levels of cash held by many equity schemes of the fund house. Excerpts:
Many countries in the developed world have announced rate cuts, stimulus packages etc. But the markets seem to be ignoring such moves and continue to fall.
These rate cuts were announced when the markets were already falling. Now, investors may be panicking because such sharp rate cuts and stimulus may suggest fears of the US economy slipping into a recession. Investors may be under the fear that the strong action from the US is actually indicative of deeper problems to come in the economy. If the Covid 19 virus does not subside within the next few months, the global economy may slip into a recession in the next financial year.
Nobody has managed an epidemic of such scale and therefore there is bound to be some panic. The only way to do a stimulus now for many countries is on monetary side, which is what they have done.
With all the global fear and panic, will our (India’s) own recovery be pushed further forward?
Clearly, the March quarter will be a white-wash. The June quarter too may not turn out so great for us. Any recovery is likely to happen only in the September and December quarters. Much depends on how the Coronavirus problem is solved or its spread is contained.
A narrow set of stocks led the rally till recent times. Barring a handful, most other stocks continue to languish. Are we paying too much for quality and safety, and disregarding expensive valuations?
Business cycles are shortening and there is an issue of corporate governance. If you see in the last 2-3 years, the stocks that have butchered the most are those that had corporate governance issues.
Therefore, a good fund manager has to avoid such stocks and has to pick those with robust governance practices.
However, when the economy recovers, more stocks will participate in the rally. Not too many companies can grow when the GDP increases by 5 per cent. In such times, the larger and solid ones will have the wherewithal to weather tough times. However, once the economy starts growing at 6-7 per cent, many more firms will start having robust volume growth, and there will a broad-basing of rallies. But if the economic recovery takes time, and we grow at around 5 per cent, fewer stocks will participate in a market up-move and there will be a flight to quality.
Is it the right time to bottom-fish in mid and smallcaps, through the fund or even the direct route? Stocks in the segments continue to languish. Are valuations inviting now?
Normally, equity markets are representative of the economic growth in the country. The stocks that participate well in that growth will get significant flows. This is the case with stocks across the globe.
If the equity markets represent the growth and RoE (return on equity) of companies, we feel that ‘growth’ as a philosophy is still better to play. With the current market fall, stocks that were expensive have corrected by 25-30 per cent and have become attractive.
Our suggestion for investors is to take a more multi-cap approach rather than going only for mid and smallcaps.
Earnings growth of the listed universe continues to disappoint for years now. At the end of every earnings season, there is disappointment of earnings missing estimates. When are we likely to witness a sustained upgrade in earnings at the index level?
India is a bottom-up stock picking destination. There is a huge opportunity for picking companies that are growing well and have good corporate governance. It is better to choose individual stocks carefully rather than chasing indices, ETFs etc. Also, given that business cycles are shortening and there is huge disruption due to the use of technology in most segments, we have to careful about just going by the output shown on excel sheets! You have to go over each company carefully, rather than going by, say, the Nifty 50’s EPS (earnings per share).
Do you feel that the budget has done enough to stimulate demand?
The problem with market participants is that they expect all the suggestions made before the budget to come through. So there were unrealistic expectations that LTCG would go and that the government would give heavy stimulus etc. But the government chose the path of fiscal prudence. This was good because if we breach the fiscal limits, and if there is a downgrade in our country’s credit rating to junk status, then we would not get the foreign inflows that we are currently getting.
They already reduced corporate tax rates significantly in September.
The budget is generally a non-event for us.
You have recently increased the cash holding across equity funds – large, multi and midcap (15-17 per cent of the portfolio). Is it to insulate yourself from such falling markets, or is it a lack of investing opportunities?
Frankly, we do not like to take out money from the market and have cash. The flows into our funds were very strong. As valuations were high in many of our existing stocks and other companies as well, we chose to invest judiciously. Normally, we would like to keep only around 5 per cent as cash in our portfolio. In the last one year, we have had many events – elections, rapid fall in economic growth (7.5 per cent to 4.5 per cent), budget etc. So, we had to tread cautiously.
Given the steep 30 per cent fall in the markets within a month, should investors consider deploying lumps-sums in the market?
I would always advice taking the SIP route. May be you can take the daily or weekly SIP route. We are in an unchartered territory as far as markets are concerned. Oil prices too have crashed and the blackswan event of the Covid 19 epidemic is still spreading. So, it is better to tread cautiously.