The government would review the impact of each move and then do more, if necessary
Sundaram AMC’s CIO, S Krishnakumar, does not believe that the fiscal stimulus package from the government would be any more than 1.5 per cent of the GDP. He states that the government must push banks to lend more to kick-start the economy. In a conversation with Moneycontrol’s Venkatasubramanian, he also speaks about opportunities in the mid and small-cap spaces, sectors that hold promise over the next few years and about evaluating long-term SIP returns. Excerpts.
Is it time to take steps like the way US did while addressing the financial crisis in 2008 – administering a TARP (troubled asset relief program) like bailout? Do you think the RBI has done enough by cutting rates and infusing liquidity (TLTROs etc.)?
The RBI has its own framework in terms of inflation targeting etc. Mr Das has been very proactive and market friendly. The one aspect on which the RBI could have worked on faster earlier was the rate policy direction.
But the RBI is not like the Federal Reserve (Fed). It can’t act like the Fed. The dollar is the world’s reserve currency. Hence, the Fed could print currency to fund deficits and carry out actions such as TARP to help banks.
The RBI has indeed moved swiftly this time around. Couple of rounds of liquidity infusion, targeted at NBFCs and microfinance institutions are helpful.
I think the government must push banks to lend more. That can be done by measures such as standing as guarantees etc., but such moves don’t work that easily.
We cannot have Rs 7 lakh crore from banks parked in the reverse repo window of the RBI!
Do you expect a large stimulus from the government? What shape and quantum would you like it to take to spur the economy?
Given the already low growth that we have, I think we would already be at the 5 per cent fiscal deficit mark for the year, without doing anything. Given the government has generally been very prudent about spending, we expect the package also to come in instalments. They would review the impact of each move and then do more, if necessary.
In March the government announced measures directed at the ‘bottom of the pyramid.’ The next move may be for the working and middle classes. Finally, there may be steps taken for corporates.
We may see stimulus measures being taken in sequence till September probably. That way, the government will be able to calibrate its stimulus. The stimulus measures can be rotated from sector to sector (construction, hospitality, aviation etc.) one after the other upon recovery in each segment.
I expect about 1.5 per cent of the GDP as stimulus, out of which we have already seen 0.5 per cent being rolled out in the Rs 1.7 lakh crore measure announced in March.
It is easy for everyone to say ‘do stimulus to the tune of 10 per cent of GDP.’ But we are not the US and cannot do so. Beyond a point, I think they have to tax the rich more.
A narrow set of stocks (in the large and mid-cap spaces) led the rally till recent times. Are we paying too much for quality and safety, and disregarding expensive valuations? When will the rally become broad-based?
In a way, India was in a bear market for the past two years. GDP growth has slowed from 7 per cent to 4.7 per cent levels over eight quarters. There were constant liquidity issues in the market. Then there was polarization in the set of stocks that rallied. More than 95 per cent of the stocks were in a bear market. Even in the bear market rally, after the corporate tax cut announcement in September 2019, only 5-10 per cent of the stocks in every index rallied.
When investors had to make a choice, they took to safety and opted for only highly sustainable businesses, with earnings momentum and visibility. When growth was scarce, people piled on to quality, even at high valuations.
But now growth is truly disrupted. Even the best of companies would probably be looking at zero revenue growth this year.
It is now that valuation becomes important.
The time has come to play reasonable valuations now.
Is it the right time to bottom-fish in mid and smallcaps, through the fund or even the direct route?
In the last six months, after the corporate tax cuts and after banks started transmitting rate cuts (thereby bringing down yields in the bond markets), there was visibility for a pick-up in the broader economy. Mid and small-caps that were going through tough times slowly started to see some improvements. This black-swan event disrupted everything again.
FY21 numbers are definitely going to look bad for these stocks. But if you go further and look at FY22 and beyond, there would be many attractive value picks from a P/B (price-to-book), replacement cost perspective. In times of panic, nobody looks at the fundamentals and so many mid and small-caps suffer. But from a 2-3-years’ perspective, they definitely offer good bargains. We have to see how this COVID plays out and stagger your buys over the next few months when there are triggers.
What about PSUs (public sector utilities)? Are they worth dabbling in now, especially given the general sense of risk-aversion all around?
PSUs are generally not in free-market businesses. They operate in segments that have a heavy regulatory overhang. Be it power, gas, oil (refining and marketing), defense, capital goods etc., there is a strong regulatory oversight in these sectors. A combination of heavy regulations and a lack of supply of paper (relatively stock liquidity due to high government holdings), along with regular business challenges that these companies face make it a tough choice for long-term investors.
In addition, some entities are expected to pitch in with funds to meet disinvestment targets.
Definitely, valuations are attractive. But when they become more market-oriented and there is less regulatory oversight, there may hold more potential for investors.
Domestic consumption has declined steeply. In this light, which segments do you think hold opportunities for you as a fund house?
In our funds, we have reduced the overweight presence in financials industrials, consumer discretionary, etc. We have gone overweight on consumer FMCG, pharmaceuticals, utilities, speciality chemicals and telecom. We are making our portfolios more diversified. These positions are taken keeping the current economic and market situation in mind.
You take very minimal cash calls in your funds. Isn’t it safer to sit on cash during falling markets?
We don’t believe in taking cash calls. Money comes in to be invested. Normally we don’t hold more than 2-3 per cent in cash. It can go up to 7-8 per cent during tough markets. We also hedge the portfolio with put options etc. At any point in time in an economic cycle, there are segments that will do well and some that won’t. The idea should be to tilt the portfolio towards sectors that are expected to do well.
Tomorrow, if, say, there is a medicine discovered for COVID and there is a vertical gap-up in the market, we would be caught unawares.
Investors find that SIPs run over even 5-7 years are in the red. How do we deal with such underperformance over such long terms?
Taking point-to-point returns can be misleading. We are looking at poor returns at the end of March after a 30 per cent correction within a month. Had we considered returns in mid-February, they would have looked better.
It is better to look at rolling returns. A good way to test a fund would be to look at three and five-year rolling returns and see how many times negative returns have been generated.
Given the fears in debt funds after the Franklin Templeton episode, what would like to tell investors?Investors must understand the risk and return profile of any investment, including debt funds before getting into them.