Rahul Singh of Tata Mutual Fund feels the portfolio strategy in the present times needs to be balanced to capitalise on the various pockets of strong earnings recovery and outlook.
“Investors should use this consolidation and uncertain phase in the market to rebuild equity exposure through a mix of hybrid (BAF, Balanced, Multi-asset) and diversified equity funds in a gradual manner,” he said in an interview with Moneycontrol’s Sunil Shankar Matkar.
The CIO-Equities at Tata Mutual Fund feels it is also important to note that there are multiple earning drivers today across export-oriented sectors, global as well as domestic cyclicals. So earnings for the full year (FY22) have inherent support despite the obvious impact in Q1FY22.
Edited Excerpt:
Q: Will the second wave of COVID-19 hit corporate earnings in Q1FY22 and FY22?
It is too early to say but the current quarter will surely be impacted as some of the service sectors have been impacted due to restrictions. Vaccine rollout is the key as we have seen cases coming down rapidly after vaccine penetration. Corporates and consumers are much better prepared this time and even the banking sector is adequately capitalized and provided for in terms of any stress. It is also important to note that there are multiple earning drivers today across export-oriented sectors, global as well as domestic cyclicals. So earnings for the full year (FY22) have inherent support despite the obvious impact in Q1FY22.
Q: Given the rising COVID-19 risk in India, have you changed your investment strategy?
The portfolio strategy in the present times needs to be balanced to capitalise on the various pockets of strong earnings recovery and outlook. As mentioned earlier, this is the first time in many years that we have multiple drivers of earnings cutting across IT, Pharma, Financials (ROE normalisation), commodities and real estate with some green shots visible in the capex cycle as well. Our investment strategy has always been a bit pro-cyclical and counting on earnings surprise and recovery in the above-mentioned sectors.
Q: Economy has started showing signs of improvement in CY21. Do you think the second wave of COVID-19 will slow it down?
It is a more difficult question to answer than earnings as there is a vast segment of the economy that is under-represented in equity markets. For instance, we witnessed the BSE 200 companies actually delivering an EBIT growth in the September 2020 quarter when GDP had a high single-digit decline. Cost cuts and global tailwinds for certain sectors means earnings can still continue to significantly outperform the GDP growth rate. There might be some impact on GDP growth but we believe that Government’s assumptions for the same in FY22 budget estimates are on the conservative side. Hence, the impact on tax buoyancy and the spending targets will be contained as long as the COVID second wave lasts 1-2 months which has been the trend elsewhere.
Q: The Indian rupee started weakening again against the US dollar. Do you think one should start investing in export-related sectors?
Export-oriented sectors like IT, Pharma and the new PLI sectors are beneficiaries of a much bigger theme of digitization and the changing global supply chain dynamics. These sectors have not traditionally performed only on the basis of weak INR. Hence, the stance should be to focus on dollar topline growth prospects for these companies which is the predominant positive thesis on these companies.
Q: What is your outlook on markets for FY22?
Nifty PER at 20.5x FY22 estimates is near the fair value range and the market returns will be a function of the earnings outlook beyond FY22. The drivers of the earnings which I mentioned above should be able to deliver an earnings growth in excess of the normalised nominal GDP growth rate (beyond FY22) of say 10-11 percent. It’s fair to say that markets can deliver either in line or better than that from a 12 months perspective. However, it’s important to focus on the sectors and stocks at this point of time in the market which can still outperform.
Q: Considering the current environment, should one stick to equity for investment or should one look at other asset classes?
Investors should use this consolidation and uncertain phase in the market to rebuild equity exposure through a mix of hybrid (BAF, Balanced, Multi-asset) and diversified equity funds in gradual manner.
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