What would the impact of the second wave of the pandemic on the equity markets in the near to medium term?
The 2nd wave of covid 19 seems to be largely concentrated especially in the states that are economically important in India. The measures taken by state governments like partial lockdown of businesses etc. are likely to impact the economy of the state as well as the country. The markets may be cautious about this in the near term even as they await the final quarter results which are expected to be good; and more importantly, the guidance from companies. As such, we think the markets are expected to be range bound in the near term as while growth in sales and profit of companies is likely to be good, markets may watch for the spread and severity of covid infections, movement in yields and global risk appetite.
Last year we saw a sharp correction in the markets due to the rising cases. This year too, with rising covid cases and poor health infrastructure, the country is in deep trouble. In such a situation, should we expect another correction in the market?
The equity markets have been range bound for the last few months. As mentioned earlier, the markets are looking at data on the spread of covid infections as well as the economic impact from the measures being taken to combat the virus by both the central and state governments. Markets may correct if the situation worsens and/or significant parts of the country go into an effective lockdown to limit the chain of the virus. The government is also trying to support the economy through fiscal as well as monetary measures. RBI recently announced limited relief in the form of forbearance for small borrowers as well as measures to support lending by Banks and NBFCs for covid related expenses.
Principal Emerging Bluechip Fund is your flagship fund. The scheme has consistently outperformed its benchmark for years. What are the three things that have worked well for the scheme?
We believe that the disciplined and robust investment approach and pure bottom-up stock selection has been the key driving factor for the scheme’s performance. Further, the 6 pillars of our investment process helped in outperforming the benchmark in longer terms like 5 years and 10 years. As a philosophy, we do not believe in taking concentrated positions and generally our investment in each company under the mid and small market capitalization space does not exceed 3% to 3.5% of the portfolio. Currently (as on Apr 30, 2020) the portfolio is diversified across 24 industries. As can be seen in the graph below, the fund portfolio has been weighted towards large cap companies in recent months.
Data source: Principal MF
Being a large and midcap fund, the scheme maintains over 40% exposure to large and midcap companies, which is higher than the norm of 35% exposure. Most schemes in the category have large cap bias. Your comments.
The large cap exposure of the fund has been in the range of 47% to 53% in the last 12 months. This is an outcome of the bottom up approach to portfolio construction. The portfolio continues to invest in quality companies while maintaining the category guidelines around minimum exposure to mid caps and large caps.
How comfortable are you with the valuation of large and midcap stocks?
Prices, in general, have surged over the last year in the markets from the lows of March 2020, but we believe investment opportunities may continue to be available in individual companies. The economy has shown resilience and is expected to recover in FY22 aided by the fiscal and monetary support, roll out of the covid vaccine and the return of economic activity to pre-pandemic levels barring a few sectors. From a near term perspective, valuations may seem somewhat stretched especially, during the ongoing 2nd wave of the pandemic and its potential economic impact in the first half of FY22. However, from the perspective of 3-5 years, there are investment opportunities across market caps. If you consider the expected improvement in economic growth along with margin expansion, the valuations do not appear to be very stretched.
The scheme has over 30% exposure to financial stocks. Why are you so bullish on this sector?
The financial sector is a lead indicator of economic growth. We believe that the growth in the sector may precede the overall economic growth. The financial services (including banks) had the largest allocation in the fund portfolio. Within this sector, the portfolio is tilted more towards larger private sector banks, insurance and select high quality NBFCs. From near term perspective, the concerns on deterioration of credit quality has subsided to a large extent. Overall, we expect banks/ NBFC with a strong liability franchise would continue to gain incremental share and this may reflect in a steady NII (Net Interest Income) growth aided by margin expansion. It is also expected that as the covid issue settles and as the economy gradually moves towards normalcy, this sector could see significant consolidation (especially NBFCs) and the strong companies with strong balance sheets and good quality management are expected to benefit.
How is Principal Emerging Bluechip Fund different from other large and midcap funds?
The fund is managed through our robust investment and stock selection process. We follow a bottom-up approach to stock selection and aim to maintain an adequately diversified portfolio with exposure across sectors. The stocks are selected based on their robust business model, competitive moats, sustainable earnings growth, superior quality of growth and demonstrated management pedigree with earnings expected to grow better than other companies in their sector.
Why should distributor consider recommending Principal Emerging Bluechip Fund to their clients?
The Principal Emerging Bluechip Fund portfolio is well diversified across sectors. The companies under this portfolio are high quality businesses with a proven track record over a long period of time and strong balance sheets. The fund provides a wealth creation opportunity to long term investors. Advisors may recommend this fund based on their assessment of the risk appetite and the financial goals of the investor.
