How do you read the Covid-19 impact on equity markets?
Covid-19 pandemic's impact on equity markets can be divided into multiple phases. In the beginning, we were looking for companies which would survive the pandemic. In the next phase, we started analysing companies that would revive faster. In the third phase i.e when the crisis is over, the market's focus would shift to companies that would thrive.
Equity markets have recovered quite a bit recently. Would you say that the worst is behind us?
Yes, the worst seems to be behind us.
Amid these turbulent times, governments and central banks across the globe have stepped in to provide timely support to stabilize the financial markets. More importantly, the policymakers have shown clear intentions that they would do whatever it takes to support the markets. This has helped in a big way to calm the frayed nerves of investors.
Further, if you look at many of the valuation metrics, it gives a sense of comfort as well. For instance, the price to book metric. The bottom of this metric that we had in March is similar to the bottom that we had in the previous crisis. So, yes, the worst is behind us.
Hereon, what kind of recovery do you see in the markets?
I think we will witness a swoosh-shaped recovery. This is a recovery scenario resembling the Nike 'swoosh' logo. This means a steep drop and a gradual recovery. Simply put, it takes much longer to return to pre-crisis growth levels than it took to fall.
What opportunities do you see in the focused fund space at this point?
We have been witnessing a polarized market for the last couple of years. We have seen that the markets got polarized in the aftermath of demonetisation, introduction of GST, the NBFC crisis and so on.
Similarly, we expect that in the wake of covid-19 pandemic, markets could get polarized further with the dominant companies drawing the pool of profit towards them. And the big players will become bigger.
Now, since the covid-19 pandemic has affected many more sectors than the earlier crises had, we feel the polarization in the market would accelerate further. And a focussed strategy could be better than a diversified one.
Tell us about the fund management philosophy of this fund. How is it different from existing focused funds?
Our focus would be to look for dominant players in each sector that have the potential to increase their market share. We will also be looking at factors such as sustainable profitability in the long term and reasonable valuations.
To sum it, we will follow the DSR framework i.e. dominant players with sustainable profitability and reasonable valuations.
Further, we do not build portfolio on external factors such as crude oil price or interest rate movement, on which we do not have control.
Risk management: Since focused funds are prone to volatility, we have robust risk mitigation strategies as well. Even as this is a focused and concentrated strategy, we will ensure that there is adequate diversification in the stocks that we pick. For instance, we will not buy more than 10% of the fund in a single stock.
What are the challenges in running a focused strategy if there is a broad based rally?
When I say dominant players, it might have led to an impression that we would invest in large cap stocks. This is not correct. We will be sector agnostic and market cap agnostic while constructing the portfolio. And thus this fund stands a chance to outperform if there is a broad based rally in the market.
Tell us about the sectors on which you have a bullish view at this point.
At this point, we have a more positive opinion on sectors like telecom, consumer staples, healthcare, chemicals and large private banks.
Meanwhile, we are negative on capex intensive and labour intensive sectors such as construction, travel, hospitality and so on.
Why do you think distributors should recommend NFO of HSBC Focused Equity Fund to their clients?
Given the huge disruption this pandemic has caused, business models will go through a drastic change. While some new business models will emerge, some of them will also vanish. For instance, business models where both consumers and enterprises have higher digital adoption would be the beneficiaries.
While some of the existing funds may find it difficult to align this thought process with their portfolio, HSBC Focused Equity fund has the advantage of starting from a clean slate. Therefore, we will take these new realities and emerging themes of the changing world comfortably.
