Mayur Patel, Principal Fund Manager – Listed Equities at IIFL AMC, said the 1-2 percent downgrade in the FY22 GDP estimates was expected given the nearly two months of lockdown in most major states.
According to him, there could be some more downside if the lockdowns extend. But, since markets tend to be forward-looking they would ignore these downgrades once the second wave subsides and the economy reopens.
Edited Excerpt:-
Q: Given the current scenario, what are the sectors that one can add to their portfolio?
The disruption caused by lockdowns would negatively affect most sectors in India. Yet, commodities are witnessing a bull run as global capacities are constrained while there is an uptick in demand.
The impact should be relatively benign on consumer staples, healthcare, IT services, and other export-oriented sectors. However, we expect even this disruption to be transitory. Investors should have a balanced exposure in some of these defensives sectors. This disruption could well be used as an opportunity to take exposure in few secular and quality cyclical sectors, which are currently impacted but would stage a smart recovery as the economy opens.
Q: Do you think the volatility will subside in the coming weeks and will the market end the year with more than 10 percent gains?
Equity markets in the US and UK have shown significant resilience while reacting to the lockdowns related to their own second and third waves. Similarly, we are hopeful that volatility in the Indian market will also subside as the situation stabilises over the next few months. Market behaviour in the first wave has reinforced our view that short-term disruptions in businesses have very little impact on their long-term DCF valuations.
Q: Brokerages and rating agencies lowered their GDP growth estimates for FY22 due to disruption by the second COVID wave. What is your take on the economy and do you expect the growth (though on a low base) estimates to fall by 3-4 percent from current estimates?
Two months of lockdown across large states simply brings down the annual GDP growth rate (originally 11-12 percent) for FY22 by 1-2 percent and that’s what is being reflected in the recent downgrades. There could be some more downside if the lockdowns extend. However, markets tend to be forward-looking and would ignore these downgrades once the second wave subsides and the economy reopens.
We are hopeful that vaccination drives across the country would significantly ramp up over the next few months, which in turn would help arrest the surge in cases and enable governments to ease lockdown restrictions.
Q: What should be investor’s strategy in the current circumstances, with respect to portfolio? Is it still a buy on decline market?
Since October-November 2020, we started seeing early signs of economic recovery as reflected in the pick-up in auto sales, real estate sales, construction activity and stabilisation of asset quality of banks. This was further boosted by the government’s renewed thrust on capital expenditure (budgeted around 30 percent growth in FY21 and 26 percent growth in FY22). The economy was set for a cyclical rebound and then it got hit by the second wave.
As the second wave subsides, the investment-driven pick-up in the economic cycle may resume and last for two to three years. Hence, it makes a strong case to look beyond the current volatility. Given the impending economic recovery over the next few years, investors should take a slightly long-term view of the market.
Q: Do you think another 10 percent correction from current levels will create panic in the market?
Sharp drawdowns always cause heightened volatility in the short term, but history suggests that such drawdowns offer good opportunity if the medium-term outlook is good.
Q: How are you balancing your portfolio strategies? Can you emphasize on the SCDV model?
We prefer to look beyond this short-term bump and maintain a balanced portfolio strategy based on our SCDV framework (Secular, Cyclical, Defensives, Value Trap). This allows us to play the long-term secular themes while also capitalising on the impending cyclical uptick, which may last for a few years. Based on our SCDV framework, we invest a large proportion of the portfolio (40-60 percent) in high-quality secular growth companies, which are long term compounding stories. The remaining part of the portfolio is invested across quality cyclicals and defensives while minimising exposure to value traps. Pure bottom-up strategy across these quadrants is deployed with an aim to generate long-term compounding while encashing on some quality alpha ideas in cyclical and defensive segments.
Q: What would be your recommendation for investors on diversification of portfolio in equity, hybrid, or debt?
The optimum portfolio mix between equity and debt varies across individuals depending on their risk profile. Based on their risk appetite, investors need to determine the allocation of this risk asset (equity) and invest systematically with a long-term view.
Equity, as an asset class, has given reasonably good double-digit returns over the long term but the key is to have at least five-six years of time horizon.
Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
