Segments which will remain under stress for a longer time are hotels, restaurants, malls, airlines, multiplexes, highly discretionary spending.
Indian stock market has climbed up nearly 45 per cent from its March lows, amid high volatility. Analysts believe that the main driver for the markets is the global liquidity and fiscal stimulus. Investors who are wanting to invest in the markets in the current scenario should consider asset allocation first, says Mihir Vora, Director & Chief Investment Officer, Max Life Insurance. He says that assets such as equity, gold, real estate, etc., must be a part of the investor’s portfolio. In an interview with Surbhi Jain of Financial Express Online, Vora also explains that pharmaceuticals, chemicals, IT software, auto-ancillaries are some of the sectors which may do well going ahead. Here are the edited excerpts from the interview:
1. Even as the BSE Sensex rallied over 43% from March lows, stock markets remain volatile. What is your near to medium-term outlook?
The market looks expensive given the current fundamentals. Valuations are expensive as profit estimates are being cut. GDP growth for FYF21 will be -8% or even lower and FY22 growth will just about bring the GDP to FY20 levels.
The last 1,000-points rally in the Nifty 50 has been quite surprising as the market went up despite significant supply of stock by promoters and companies issuing new equity. While the foreign investors’ purchase number looks healthy, a large part of the purchases has been through block deals, offer for sale and QIB placement of shares. Mutual fund flows are also muted – thus a large part of the market optimism is due to an exponential rise in retail trading volumes in the cash equity segment over the past 4 months.
However, the key driver for the market is the global liquidity flood, central bank balance sheet expansion, near-zero interest rates and fiscal stimulus in the developed world. The way markets and all asset classes have moved up in the past 3 months, it needs a continuation of these for the bullishness to sustain – valuations are expensive as corporate profits are under pressure.
Overall, the markets will remain volatile due to an interface of two massive forces i.e. the pandemic-linked slowdown and uncertainty on one side and the massive policy actions to keep markets afloat on the other side. The next few months will be interesting to watch.
2. Apart from rising COVID-19 cases, what is worrying the stock markets and denting the investor confidence? Going ahead, what factors would drive the stock markets?
Well, if we look at the last 3 months, investor confidence seems to be back in the markets. Retail investors have made money in the past 3 months by buying stocks. Thus, while institutional sentiment is cautious, retail money is driving the markets and this phenomenon is also seen in other markets like the US.
The cautiousness stems from the fact that while the stock market has seen a V-shaped recovery, the underlying economy is reacting slower. Sporadic and unpredictable lockdowns in different parts of India and rest of the world are elongating the recovery cycle. Vaccines will take at least a few quarters to be approved and commercialized. Manufacturing vaccines in large quantities will also take time but the good news is that death rates are going down mostly everywhere. Events on the border may create volatility from time to time.
Many segments of the economy will be facing reduced demand for quite some time even after normalcy returns. We don’t know the secondary and tertiary impact of the lockdown-induced slowdown on small businesses, employment and consumption patterns and change in consumer psychology. Moreover, India has had limited fiscal measures to stimulate growth. While many developed countries have introduced fiscal stimulus of 5-15% of GDP, India has implemented about 1% so far. Even before the pandemic, India had growth issues, so a V-shaped recovery for India is unlikely and getting to a 7+ growth rate on a normalized base will take a couple of years.
It should also be noted that global sentiment has turned positive because of massive policy actions by the US Fed, the European Central Bank and Bank of Japan. These have unleashed unprecedented amounts of liquidity into the global financial markets which has lifted all asset prices. The markets need such strong support to continue. Any perception that the central banks are reducing the liquidity spigot can have sharp negative reactions in the market.
3. How should investors invest in the current market? What advice would you like to give to the retail investors making investments via SIP?
The most important decision is asset allocation. Equity, Fixed Income, Gold, Alternate Investment Funds (AIF), Real Estate should all form part of the investor’s portfolio. Equity Funds, AIF are the higher-risk, higher-return part of the portfolio. Gold, Bonds and Commercial Real Estate are the relatively more stable parts. The proportion of these depends on the financial profile and the psychological profile of the investors – these profiles define the risk appetite.
Any systematic investment program assumes that the risk-appetite and asset allocation have been analyzed and that the investment pattern is based on such analysis. The asset allocation decision already takes into account the inherent volatility of that class. Thus one should keep investing as per the pre-decided pattern. Strategic decisions should not be changed due to short-term volatility.
4. Which investment themes and opportunities look attractive currently?
There’s still scope for selective stock-picking. Even within the large-caps, there are many stocks and segments which have lagged, are cheap and may pick up as the growth uncertainty fades away. Some of the themes which have traction are 1) rural economy doing better than urban. This makes the case for segments like paints, FMCG, motorcycles, cement, rural financing etc. 2) Make-in-India theme getting traction due to the China issue and 3) exporters and outward-facing sectors may do better as the recovery in US and Europe may be more immediate compared to India due to the large fiscal measures by these countries. Thus pharmaceuticals, chemicals, IT software, auto-ancillaries may do well.
Segments which will remain under stress for a longer time are hotels, restaurants, malls, airlines, multiplexes, highly discretionary spending. If the market stabilizes at these levels and the growth uncertainty reduces, mid and small-caps may outperform as they have lagged significantly over the past two years. However, it needs a continuation of benign monetary and fiscal measures.