Vinay Paharia, Chief Investment Officer at Union Asset Management Company feels that the market is trading at a small premium to its current fair value.
“This value is likely to compound, driven by sustained economic growth and hence, we remain optimistic about investing into equities with a medium to long term time horizon,” he said in an interview to Moneycontrol’s Sunil Shankar Matkar.
In his professional career of more than 18 years, Paharia has worked with Invesco Asset Managment (India) as fund manager – equity, DBS Cholamandalam AMC, KR Choksey Shares and Securities and First Global Stockbroking as an equity research analyst.
Edited excerpts:-
Q: What should be investors’ strategy now considering the weakness and volatility in the market amid rising COVID-19 infections?
Markets are always driven by fair value over the medium to long term. At current levels, the market is trading at a small premium to its current fair value. This value is likely to compound, driven by sustained economic growth and hence, we remain optimistic about investing into equities with a medium to long term time horizon.
Q: Will the restrictions announced by several states due to rising COVID-19 infections impact earnings growth in the first half of FY22?
We think investors should not fixate too much on impact of various events on near-term earnings, but focus on the impact on underlying fair value instead.
Equity markets are amazing discounting machines. It continuously discounts cash flows up to perpetuity with cost of equity. Hence, in March 2020, when the pandemic and related lockdowns had just started, the markets discounted extreme outcomes for fair values. This was due to the uncertainty of the economic impact of the pandemic.
However, as the time progressed, it realised that the economic impact was far smaller that it had earlier estimated and hence the ensuing recovery. Now, as the second wave of the pandemic is progressing, we expect that its impact on fair value is likely to be limited.
Q: Will you change your economic growth estimates for FY22 as COVID-19 infections have been increasing day-by-day?
The current wave of infections and the related lockdowns could impact the economic activity and result in a downward revision of FY22 economic growth estimates. However, the magnitude of this revision would depend on the longevity and severity of the ongoing second wave of the pandemic.
Q: Given the weakness and volatility in the market, what are the sectors to add in portfolio and why?
We are overweight IT and telecom sectors. The IT sector has seen an upward shift in demand curve on a structural basis. If we look at the commentary from some of the bellwether companies, we realize that it is not for just 1-2 years when companies are going to see an increase in IT spends, but it is a structural long-term trend of increase in demand.
When there is a structural increase, it increases the underlying fair value. As a result, the potential upside in IT companies still remains robust despite decent outperformance of the sector.
Telecom sector is expected to witness benefits of consolidation and rise in demand due to increased data consumption by both consumers and enterprises.
Q: What is the mood at mutual funds’ desk, especially after the first monthly net buying in March in last 9 months?
Our advice to investors is to systematically invest in asset allocation products like the Balanced Advantage Fund. Generally, these products reduce their allocation to equity when markets are expensive and increase when markets are cheap. They defeat the most important enemy of an investor – his own emotions.
Q: What is the trend at retail investors’ desk, as they have lowered their investment in primary market?
We are noticing an elevated level of activity from retail investors, as is evident from growth in demat accounts, cash trading volumes, IPO frenzy, etc. While we refrain from taking a short-term call on the market, we are optimistic about investing into Indian equities with a medium to long term time horizon.
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