How do you read covid-19 impact on equity markets? What is your near-term outlook on the equity market?
The immediate reaction of equity markets to Covid-19, as we witnessed in March, was that of extreme panic. The precipitous fall in stock prices in March reflected an extreme fear in the minds of investors. The subsequent sharp bounce back in April was surprising, as it starkly contrasted with increasingly grim news flow on the economic front. We believe, in the near-term, markets will stay volatile driven by emotions dictated by news flow and fund flows (FII/domestic).
While it is impossible to predict the bottom at any point, do you see the lows touched by equity indices in March as an extremely strong support level at this point?
It is indeed impossible to predict bottoms and highs of the market. However, it is reasonable to assume that March lows might act as a strong support. The market reached those levels due to peak fear (reflected in record VIX index- a fear gauge) and highest ever monthly selling (well over USD8bn) by FIIs.
There are all sorts of theories about the recovery in equity markets. Among the suggestions are a U-shaped recovery, V-shaped recovery and W-shaped recovery. What are your views on this?
From what we know today, economic recovery is likely to be more gradual than sudden. However, despite gradual economic recovery, it is possible to have a sharp market recovery (though, that’s not our base case as of now). In the event we get any good news on the health crisis (in terms of promising results for a new vaccine or treatment), market mood could suddenly change for the better.
In the next couple of years, what strategies can turn out to be the most effective? (For instance, diversified portfolio or focused portfolio, growth vs value and so on)
Given that the level of uncertainty and volatility will likely be high over the foreseeable future, it is prudent to invest gradually through an STP or an SIP route. For investors with a long term horizon (3-5 years & beyond) quality mid cap and small cap mandates will likely deliver above normal returns from current levels. In case, any investor wants to invest lumpsum, we recommend mandates that offer higher flexibility to fund managers (multi cap funds and large & mid cap funds). Given current conditions, diversified growth-oriented portfolios are likely to deliver respectable returns over medium term.
Many fund managers feel that large companies have better ability to weather challenging times such as the current one. Therefore, betting on the large cap stocks heavily is a better idea than the small and mid cap? Your comments.
I will rephrase the proposition as, ‘’Strong franchises have better ability to weather challenging times’’. It is important to remember that large cap, mid cap and small cap (the way we use these terms post new SEBI classification norm) definitions are relative and not absolute. (i.e. top 100 stocks by market cap are called large caps & so on). So, there are many companies with quality business franchises & competent managements that happen to be mid cap & small cap stocks. Many of these are leading companies in their own fields but are not in the top 100 by market cap because the product market segments they operate in happen to be relatively small. We should not equate size with quality.
Given the current market dynamics, how are you striking the balance between deploying money right away and sitting on cash for some time to take advantage of a further correction?
All our funds are open ended. So, our investors can invest and redeem their money any time they wish. The reason they invest in any fund is because they are seeking exposure to that particular segment (say a multi cap or mid cap). They do so after reviewing their asset allocation with their distributors. Therefore, it is our duty to fully invest their money in the asset class they seek an exposure to. As we strive to stay true to mandate, we do not typically take large cash calls in our pooled funds, as that would be tantamount to second guessing investors’ asset allocation.
You have seen multiple bearish phases in your career. How different is this one?
This phase is bigger in scale, scope & severity compared to anything we have seen in the past. The conscious suppression of activity across the globe (to fight the spread of the virus) is unprecedented and is causing huge damage to economies & businesses at least in the near term. It is true that monetary & fiscal authorities’ world over have acted fast and unleashed countervailing forces to fight this damage. However, these measures might have unforeseen consequences in the future. Moreover, there are likely to be many fundamental changes in the way we live, work and transact. In short, the level of uncertainty about future outcomes was perhaps never higher.
Which are the sectors that you are overweight and underweight at this point?
At this point in time, we are overweight on chemicals, telecom, pharmaceuticals and underweight on financials, autos and IT.
