What would be the impact of the second wave of coronavirus and lockdown on Indian businesses?
The lockdowns in the second wave are less stringent than last years as most manufacturing units are open. However, in terms of population and areas affected, impact of second wave is higher. Thus, some downgrade of GDP estimates and financial year 2022 earning per share (EPS) estimates would happen. However, to judge the full impact, one would have to estimate how long the severity of this wave would last and how long these lockdowns continue. Early signs that we are seeing is cities such as Mumbai, Pune which were first to be impacted in the current wave, are stabilizing. If this trend continues, the economic impact would be much lower than initially feared.
How is equity market placed to tackle this situation? What are the key triggers and risks for the market?
Based on the recent data points, one can see that sectors related to global economy such as export of goods and services are doing pretty well. Their end markets are past the second wave and recovering fast. The more domestically oriented sectors would take some time to recover. However, to some extent, these risks are already priced in the market. We believe, post this hiccup due to second wave of covid, Indian economy would resume its growth path. In near term, the strong liquidity and ‘risk-on’ sentiments have continued to support equity markets worldwide. This has supported our markets also to tide over this phase with less volatility. Thus, near term the key risk is reversal of liquidity and increased volatility in global markets. However, over the next 3-5 years, the revival of economic and earnings growth should augur well for equity markets.
Despite the pandemic, equity markets have rallied across market capitalization. What is your view on the current market valuation of value stocks?
Low interest rates, abundant liquidity and prospects of improving economic growth have kept markets strong both globally and locally. This has kept the market valuations at the higher end of historical ranges at an aggregate level. However, for many cyclical sectors, despite the recent run up, valuations are nowhere near their peak. Many sectors are coming out of a long phase of underperformance. Thus, with a three–five year view, many of these companies offer scope for positive earnings surprises and valuation rerating.
ITI MF is launching a ITI Value Fund that is said to unlock the hidden value. What is the rationale for launching value fund at this time?
We are entering a phase of broad based economic and earnings growth. Unlike the previous decade, now easy monetary policy is supported by increased fiscal spend by governments, resulting in broad based economic recovery. At the same time, market valuations at aggregate level are at the higher end of historical averages. Hence, we need to have a fund with a keen focus on value, which offers relatively better downside protection as well as good long term upside. Hence the launch of ITI Value Fund.
What is your belief on value picking and how do you filter value stocks?
We believe the essence of value investing is buying stocks at prices which offer high margin of safety. Margin of safety is the difference between the intrinsic value of a stock and its current market price. Stocks with higher margin of safety would provide better longer term returns, with relatively low risk. Thus, we don’t define ‘value’ in terms of some statistical ratio below or above certain threshold. The intrinsic value of different stocks with different business profiles, varying cyclicality and cash flow characteristics would have to be judged differently. Thus, we focus on the price value gap or margin of safety in judging ‘value’ opportunities.
Value Research data shows that in terms of performance, the value fund category has lagged far behind most of the equity fund categories in the long term. In such a scenario, why do you think it deserves place in investment portfolio?
The last decade was a period of low economic growth accompanied by low inflation (deflation in certain sectors) and low interest rates. Further economic growth was restricted to a few sectors and was not broad based. This resulted in underperformance of value category in general. However, the economic landscape of this decade is different with broad based growth and some uptick in inflation. This macro environment is much more conducive to value investing.
How is ITI Value Fund different from other value schemes in the industry? And why should distributors recommend ITI Value Fund to their clients?
We define ‘value’ as high margin of safety i.e. the difference between a stocks intrinsic value and its current price. We don’t try to define value based on certain statistical ratios. This approach, we believe, would help us separate ‘value stocks’ from ‘value traps’ and provide strong long term returns. The emerging economic scenario of improving and broad based earnings growth is also conducive to value investing. Strong focus on high margin of safety would also help in reducing downside risks in a market where valuations are at upper end of historical averages. We feel, ITI Value Fund would provide good long term returns to investors.
