Life insurers, AMC, Consumption, PSU among 4 themes likely to create wealth
Q) A big bailout package unveiled by the Cabinet on the real estate sector is something which was the need of the hour. Do you think the amount is enough, or the government may have to put in more money to move the needle? Any stocks which are likely to benefit the most from the package?
A) The package announced could boost sentiments, kick-start liquidity flow and provide relief to homebuyers, developers and real estate financiers.However, the successful implementation will require close coordination between all stakeholders. There could be a significant challenge in its implementation, considering the complexities and multiplicity of stakeholder involvement.
It could take about two years to get the eligible stalled units completed. And, if the process kicks-off without too much delay or interpretational issues, sentiments could turn around sharply resulting in feel-good factor spreading across the economy even before the completion of stalled units.
Q) Given the fact that we are trading near record highs – what should be the investment philosophy of investors?
A) While markets are near all-time highs, this does not mean it will not make newer highs over the next few months. Having said that, the risk-to-return ratio from the current levels on an overall basis is turning unfavourable by the week.
Investors have got an opportunity to review the stock or the portfolio, get rid of stocks that may not perform in the future due to disruption, competition, governance or other issues.
They can then either gradually raise cash (to deploy after the markets have corrected significantly) or move them to high-quality stocks (being aware of their high valuations) which will allow them to participate in the up move or protect the downside whenever the sentiments turn adverse.
Q) We are almost done with the September quarter earnings; how did India Inc. perform so far in Q2. Any bright spots which one can look at?
A) On an overall basis, sales have stalled in the September quarter partly due to weak demand and partly due to poor pricing power. However, lower expenses (helped by lower commodity prices) and taxes have helped boost margins.
Financials (especially PSU) reported better asset quality on a sequential basis, curbing fears of continued slippages across the board. However, private banks saw a rise in stressed pool and provisions. Lower recovery and delayed resolution of IBC cases led to this.
Q) We have seen large-caps stocks leading the rally on Sensex and Nifty while the broader markets remain under pressure. Can we say the big wealth will be created in quality small and midcaps if someone is looking at a time horizon of two-three years?
A) Small and midcaps went out of favour since 2018 due to regulatory changes adopted by the exchanges and SEBI/RBI whereby traders got disincentivised to buy/hold on to these shares for long.
Skeletons came out of some promoters’ cupboards due to the relentless price fall. Disruption due to technology, e-commerce, etc. also impacted the business models of quite a few companies.
Rising interest rates accompanied by lower availability of credit affected the working capital cycle of some companies.
A lack of entry barriers in most sectors meant that capacity buildup was more than necessary even as financiers were lax in funding projects up to a few years back.
Lastly, in some cases, the valuations which have risen abnormally high earlier reverted to their mean.
Investors have now become choosy about governance and capital allocation decisions made by the companies’ management. Many small-cap and mid-cap companies may fail the test of survival in an era of constant disruption – be it owing to regulations or technology.
Retail investors should learn from market moves, and may also want to upskill themselves regarding the ways of the markets, and individual stocks’ financials/valuations.
A staggering investment in direct equities after sufficient due diligence may result in lowering their risks, in an era when the world is witnessing a paradigm shift in business models and the valuations assigned to them.
Select Mid-and-small-cap companies will keep throwing up surprises in stock moves, based on their small size/base, faster adjustment to emerging changes, financial and operational restructuring, corporate announcements including mergers, demergers, hive-offs, turnaround, asset value unlocking, etc.
Q) With FD rates going dry, what are the other avenues of investments which investors can look at if they are looking for something secure?
A) Govt debt including RBI bonds, instruments available to senior citizens like Senior citizen savings scheme, Vaya Vandana, etc. help investors lock the rates that they can earn over a long period.
However, for investors falling in the high tax bracket, tax-free bonds, debt mutual funds (held for more than 3 years) offer post-tax returns that are competitive even in today’s times.
Q) Do you think Realty and Autos could turn out to be the dark horse for the year 2020?
A) In realty, we have limited listed players, and very few among them are currently in deep trouble. This means that they may not react majorly to the recent positive triggers till real estate (especially residential) becomes more affordable and inventory levels come down.
Auto stocks have recently bounced up on hopes that the worst in the volume numbers are behind us. However, we need to cross the festive season to see normalised growth and also cross March 2020 to see the impact of pre and post-BS-VI norms coming into effect. We think that Q2FY21 could see the start of good times for Autos.
Q) The big question which most investors have – is the worst behind us in terms of domestic macros as well as earnings?
A) It may be a little early to conclude that the worst in terms of macros and earnings are behind us. We still have to come out of the liquidity issues that are plaguing the NBFC sector and the larger economy; tax collections have to grow, Govt borrowings have to be under control; at the same time, the rural/urban economy has to be boosted for consumption.
Earnings on an overall basis could take some more time to start rising although they may not show much deterioration from here. The stress on Banks, Metals, Infra sectors needs to reduce so that these sectors start contributing to the overall earnings.
The impact of global developments including US-China trade issues, the geopolitical situation, etc. need to be conducive for the above to happen.
Q) Sectors that are likely to lead next bull run – Insurance, AMC Business or zero debt companies such as IRCTC?
A) We are comfortable with BFSI (including life insurance, AMC), Consumption stocks though the entry timing needs to be fine-tuned. PSUs can also provide good returns in case the Govt gathers the courage to conduct one big strategic divestment at a fast speed.
Disrupting (vs disrupted) companies can provide abnormal returns as they would depend on technology to be a key enabler of their business and would want to remain ahead of the competition.
Q) What should be the strategy of investors with respect to MFs? Even though Sensex might hit a record high in November, most of the portfolios are still running into losses.
A) The lopsided markets have resulted in very few mutual fund schemes performing well even as the Sensex is at an all-time high. Investors may need to
1) keep reviewing their existing investments in schemes and weed out consistently underperforming schemes to be replaced by schemes that have done well over the past few quarters,
2) keep a good mix of lump sum and SIP investments so that they can benefit from cost averaging (in SIPs) and value enhancement (in a lump sum) if the markets continue to do well going forward, and