Ajit Banerjee, Chief Investment Officer, Shriram Life Insurance, is hopeful that the expansion of the vaccination drive and nod to the Russian Sputnik V jab will contain the coronavirus spread, reversing the temporary slump in the economy.
If curbs remain localised and restricted to short durations, the economic fallout would be limited, with some bearing on Q1 earnings, he says.
In an interview to Moneycontrol’s Sunil Shankar Matkar, Banerjee says if the market continues to fall, defensive sectors like pharma, IT and FMCG will find favour, with IT leading the pack. Edited excerpts:
Apart from coronavirus, what are the other risks to be considered before taking positions in the market?
Before taking any positions in the market, the investor should be very clear about his risk appetite and his intent of how long he wants to stay invested, as these two points will have a significant bearing on his taking positions. Once there is clarity on the first two points, then the investor needs to understand the capability and capacity of the investee company’s willingness to adapt to the dynamic business environment and embrace new technologies to remain competitive and maintain its leadership position in the industry as Darwin’s theory of survival of the fittest rules the market.
The second most important point to consider is the valuation at which the stock is priced. Is it fairly priced or excess priced or underpriced? Considering the future prospect of the company as market is always forward-looking.
What is the mood on retail investors’ desk, given the volatility and nervousness in the market?
Needless to say that the euphoric and optimistic mood which got built up from November 2020 onwards led by the decline in the COVID cases and the gradual restoration of normalcy in life and economy has been spoilt by the second wave of COVID. As the number of cases getting reported have crossed all the earlier records and lockdowns are getting imposed on localised basis, investors are getting skeptical if last-year-type nationwide lockdown would get imposed. However, there are certain positive news as well, which is also enabling investors to remain optimistic which are as follows:
a) Vaccination drive has gained momentum over the period and with government’s latest announcements for permission of additional vaccine availability (Sputnik) and permission to import the vaccine manufactured by Johnson & Johnson will certainly help more population to get vaccinated.
b) Going forward, the open market availability of the vaccine would certainly play a big role in the accelerated vaccination happening in the country, thereby leading to the development of herd immunity.
c) There are studies that have shown that in countries where vaccination has covered almost 65-70 percent of the national population, herd immunity has developed leading to the faster restoration of normal life.
Hence investors are expected to behave more matured this time by not resorting to panic and distress sale when interim dips happen and stay put in these periods and make some value-driven stock selection and shopping.
Do you think the second wave will impact the first quarter as well as full-year earnings?
The response to this question lies on the extent of lockdown that is getting imposed ie localised lockdown or nationwide lockdown and the duration of these lockdowns. If it’s restricted to a fortnight and in localised patches, then the impact on the economy would be comparatively lesser, with some bearing on Q1 earnings. However, these earnings shortfall can be made up over the residual part of the year, assuming that the economy would recover fast.
The organised large-scale sector corporates would be able to recover fast from these initial blips that may take place but unorganised sectors like MSME etc, brick and mortar retailers and microfinance would face more consequential damages even if the lockdowns are localised and of short durations.
Do you still expect double-digit GDP growth in FY22 even though several states have imposed stringent curbs on the movement of people to control the spread of the virus?
Coincidentally, the states such as Maharashtra, Tamil Nadu and Karnataka, which contribute significantly to the country’s GDP (for eg Maharashtra contributes to 13 percent of India’s GDP) are the ones which are more adversely impacted in the second wave and more strict lockdown in these states are imposed by the respective state governments.
With proposed accelerated vaccination drive, it’s expected that the COVID spread would be contained and thereafter the statewide lockdown would get relaxed and the temporary economic slump would get reversed soon. Hence in the revised circumstances, we can perhaps expect GDP growth to revise downwards in the range of 10-10.5 percent as against 11-11.5 percent.
What should investors buy if the fall continues and the sentiment remains weak for a couple of months?
In the event of continued fall in market levels and sentiment turning weaker, defensive sectors like pharma, IT and FMCG will find favour, with IT leading the pack. However, the value investors would continue picking value stocks for longer-term investments. The majority of the investors believe that there would be some disruption in the market and hence intermittent dips in market levels would be expected in Q1 till such time the second wave of the COVID comes under control. So mass pull out by domestic retail and DII isn’t expected but incremental inflows from FII and FPI might hit a pause till the situation improves.
Do you expect the rupee to weaken further? Will it have a bearing on FII flows as well?
As per the latest Real Effective Exchange Report (REER) released by RBI in January 2021, the REER for the rupee computed by BIS has depicted the rupee as being rightly valued or slightly under valued. The RBI has maintained that its intention is to maintain stability in the rupee movement and not to target any specific level for the exchange rate. Hence, we can expect that the RBI will try to main a stable rupee going forward without any significant attempt to depreciate the rupee.
A weak currency has been hurting our importers and hurting profit margins of companies, besides being inflationary in nature. Foreign investors would tend to think twice about investing in a country with a currency that is on a downward spiral. For the return on their holding tends to erode with fall in currency value. I am sure RBI is mindful of these ramifications of an unstable and uncompetitive currency and will take the appropriate measures.
Since the beginning of the last lockdown, auto, pharma, IT and metals witnessed triple-digit gains. As we face a similar situation now, can you name the sectors that can give triple-digit gains by April 2022?
A lot will depend on the extent and duration of the lockdown and how much it would impact the economy in terms of creating a scar. If the impact is significant, then defensive sectors would certainly be the preferred segment and would generate a reasonable good double-digit returns. However, as of now, the lockdown is expected to be localised in nature and can be for fortnights to break the chain, which should not deter the economic growth of the country and thus cyclical stocks would continue to outperform. The return computation would also depend on the corresponding comparative period where base effect comes into play.
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