Kuleen Tanna, Portfolio Manager at Fidelity International highlights that the start of a new investment cycle (both in real estate & corporate capex) supported by favourable government policies and easy liquidity (both locally & globally) can lead us into a virtuous cycle of strong economic growth for many years to come.
In an interview with Moneycontrol’s Kshitij Anand, Tanna, who has over 10 years of experience in the capital markets, said that if the economic recovery plays out, we are quite likely at the cusp of a big earnings upgrade cycle in my view. Edited excerpts:
Q) What a ride it has been for the bulls – both Sensex and Nifty50 climbed crucial psychological levels after the Budget 2021. What is the way ahead of markets?
A) While it is very hard to say what happens to the markets in the short-term, I am very hopeful and optimistic of where the economy and equity markets could go in the coming years. There are a couple of reasons for that:
Firstly, after nearly a decade, we are seeing signs of revival in the real estate market – which is a big employment generator and has a big multiplier effect on the economy. A combination of record-low interest rates and the best affordability levels in over two decades are driving this revival in my view.
Secondly, again after close to a decade again, we are seeing very early signs of revival in the corporate capex cycle. Companies across various industries are sounding very optimistic and looking to put up new capacities.
Thirdly, and quite importantly, there seems to be a big shift in the government thought process. In the recently announced budget, the government acted boldly and moved away from its fiscal consolidation path and chose to support the nascent economic recovery instead.
The prime minister on the floor of parliament acknowledging the role of the private sector in wealth creation & employment generation is again a big deal in my view and indicates a big change in thinking.
The start of a new investment cycle (both in real estate & corporate capex) supported by favourable government policies and easy liquidity (both locally & globally) can lead us into a virtuous cycle of strong economic growth for many years to come.
Q) The underline assumption in the equity market is recovery in the economy. We are seeing some green shoots in the economy but do you see any risks to the ongoing rally both local and global?
A) Markets could and do correct from time to time for a whole host of reasons. However, if the factors discussed earlier hold course and the economic recovery continues, there is no reason why the markets should not bounce back as and when the corrections do happen.
Q) The December earnings seasons cemented the fact that recovery is underway. Data suggests that over 70% of the Nifty companies have reported earnings in Jan’21 have beaten estimates. Do you see more upgrades to the earnings cycle than downgrades which was the trend for the past few years?
A) As you rightly pointed out, for the past several years we have started the year with earnings growth forecasts which then witnessed steady cuts as the year went by. After a long time, we are seeing an earnings upgrade cycle.
We human beings have many cognitive biases and tend to think of outcomes (both for company earnings & stock prices) in narrower bands than are actually probable and possible.
If the economic recovery plays out the way we discussed at the start of this conversation, we are quite likely at the cusp of a big earnings upgrade cycle in my view.
Q) Common argument which is given is premium valuations are sustainable in light of economic and earnings upcycle. Earnings upgrades would support and drive valuations. Do you agree?
A) Valuations are driven by a whole host of factors, both absolute & relative. Size of opportunity, stage of the cycle, growth rates, sustainability of growth, how profitable is the growth, interest rates, are just some examples (besides the ones you mentioned) that determine valuations.
As of now, all the stars seem to be aligned for Indian equities.
Q) So where are the opportunities in the market which investors can grab post Budget 2021?
A) Given that the future is uncertain, I tend to think of stocks in terms of risk-reward trade-offs. Without getting into specific names, I see favourable risk-reward in banks, industrials, IT, and certain commodity sub-sectors.
There are obviously bottoms up opportunities in other sectors as well, but these are the broad areas where I am finding a lot of value.
Q) Retail investors have consistently pulled out money from MF and January was no exception but SIPs continue. What does the trend suggests – does it mean that retail investors who can manage money are using the trading channels to route the money or there is a larger trust issue?
A) Honestly, it is very tough to say exactly why retail investors have been redeeming money from their mutual funds but continuing with their SIPs. This is more so difficult for me to answer since we do not have a presence in the domestic mutual fund industry, so I am not as close to the ground on this subject.
It is possible some investors are redeeming their mutual fund units and investing directly as you are suggesting. It is also possible that some investors are using this money to fund their down payment for a house purchase, or using this money to invest in other asset classes such as gold.
I can also think of a scenario where small to medium-sized business owners used some of their equity savings to tide over the COVID crisis, or are using it to fund their expansion plans. In all likelihood, it is probably a combination of all these factors (and some more).
What I can say though, is that I do not think there is a larger trust issue here. If there was a trust issue, then SIPs would not have been so sticky throughout 2020 (while there was a decline in SIP flows, it was not as large as one would have imagined). SIPs flows are close to pre-COVID levels since the last 2 months.
Another factor that makes me believe that there is no larger trust issue at play, is the fact that there have been some pretty large new fund launches over the last few months. If there was a trust issue, I do not think we would have seen such good responses to some of these new fund launches.
Q) How should investors invest money – go the SIP way or make a diversified portfolio of 15-20 stocks or mix of both to take leverage of growth push seen in the economy?
A) I do not think investing can be a part-time job. So, for those that do not have the time and bandwidth to invest their money on their own, they should invest their money via professional managers (whose investment philosophy resonates with that of the investor and whose portfolio reflects the philosophy).
For those that choose to invest with professional fund managers, SIP is a good route as timing markets is extremely difficult (if at all possible).
That said, I do not think it is a bad idea for someone to invest in certain sectors or companies which they are quite familiar with and have a unique/deep understanding of.
Q) Sensex climbed historic levels of 52000 while Nifty50 broke above 15300 – how do you chart your journey in markets and any instance which you would like to share with your readers when you got stuck but eventually got through?
A) I have been fascinated by equity markets from a very young age. I started following the markets quite closely from my college days – around the dot com bubble.
However, I formally joined the industry after completing my CA in 2005. I was very lucky to get an opportunity to work with Fidelity after completing my MBA at London Business School in 2011. I have been very fortunate to work with and learn from the brightest minds in the industry throughout my career.
While it would be great to share some success stories with the readers, I think it is important to let them also know that there are going to be times when one is wrong, and that’s ok – as long as one is humble enough to acknowledge it, learn from it and try not to repeat it. Going wrong from time to time is just part and parcel of investing.
The very best of investors are right only 55-60% of the time. I have made my fair share of mistakes (and will continue to do so). But hopefully, I will keep learning from them and avoid similar mistakes in the future.
Investing in excellence is a journey and not a destination. There is something new to learn every day, and that’s what makes this industry so much fun!
Q) Your checklist to investors on how to pick stocks in 2021 or post COVID as the pandemic changed a lot of things, the way business work, the metrics etc.
A) I do not think that the fundamental way in which one evaluates companies and investment opportunities have changes. Yes, digitization has been fast tracked and brought forward by a few years, but digitisation was already well underway even pre COVID.
Evaluating companies’ digital strategy (both in terms of defence & offence) has already become part of investment due diligence for a few years in my view.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.