Will economic recovery be much longer drawn out than what markets indicate?
Recovery will definitely be long drawn out. Companies are operating at much lower capacity than earlier. There are still some bottlenecks on the supply and distribution side. These are being addressed slowly. It is the demand side where problems could persist. Small entrepreneurs have lost their businesses, employees have seen job losses and salary cuts. Consumption will remain sluggish for some time. GDP may show degrowth. Recovery will probably happen next year. Markets also expect this but what is driving it is the availability of liquidity across the globe. Governments and central banks have provided enough liquidity. These flows will find their ways into emerging equity markets. US markets are now back to pre-Covid levels. FIIs have started coming back.
Will there be another sharp sell-off?
There is always a risk in such an environment. We always say that markets eventually reflect earnings. If earnings remain weak then markets will show that. When that will happen is not certain. We don’t know if it will be as steep as in March or more calibrated. March saw an immediate reaction where everybody sought an exit. It may be comparatively more tempered. So there may not a sharp sell-off. But given the sluggishness in earnings, the higher the market rises there is always a risk of correction.
How is the ‘new normal’ likely to shape up for India Inc in the post-Covid world?
Business models may not undergo a drastic change. But there will be changes in terms of higher investments in technology to enhance distribution and reach. Consolidation is likely to pick up in some industries. Weaker players who cannot sustain the business may get acquired by larger players. This will happen over the next few months. Private companies were sitting on excess capacity even before the pandemic. So they may not be in a rush to increase capacity now as utilisation has to first improve before they commit to new projects. Public capex may pick up.
What would you suggest to investors who feel they have “missed the bus”?
If you are thinking of coming in now because you missed an opportunity in March, it is not advisable. One has to be clear about where one is in his own life cycle, what is the capacity to save and what are the goals. That should drive your desire to remain invested or to reduce or increase exposure. Your risk appetite was probably high last year when confidence level was high. It may now be different. Risk appetite may have changed. Some goals may have to be revisited. These factors should guide your actions and not the fact that equities have rebounded sharply. That is not the right way to look at it.
Which sectors or themes are likely to lead the recovery?
We have seen sharp corrections in financials, consumer discretionary, engineering and technology. Certain stocks in these sectors have become attractive from a valuation perspective. However, these may not recover immediately. There is some pent up demand which is likely to come through first as the economy reopens. So some consumer names are likely to see immediate kicker to growth. But as pent up demand reduces, consumption may slow down. The engineering sector is not likely to see capex announcements in a hurry. But the stock prices have corrected environsignificantly in this space, throwing up some good opportunities for the long term.
Considering distortions in companies’ earnings profile, how do you ascertain value?
The picture will certainly be distorted when you are trying to estimate near term, say, next 1 year earnings. That will be the base for your future earnings. But as a value player, we will be more conservative in assumptions for the coming year and the expected rebound next year. The situation is still fluid and the earnings numbers may be very different from what we had projected earlier. Just to avoid risk, we will take a deeper look at the balance sheet metrics –whether the companies have sufficient cash flows and if leverage is too high. A company has to first survive the slowdown. For that it will need balance sheet strength. While valuations will look attractive, if the balance sheet is weak it will not be an investible opportunity. Managements which have the ability to raise money at low cost may be able to tide over temporary problems better.
Are value funds likely to make a strong comeback?
If the recovery sustains, value names will also show healthy recovery and the trend may persist. The challenge for growth companies is earlier assumptions were for high double digit figures. It looks like that will take some time. The preference for those kind of growth stocks may be low. Some may shift to value stocks. Also, if there is no fear of dividends being paid, investors may prefer value stocks that give out fairly good dividends. But again this depends on availability of liquidity. If the same easy liquidity continues, it is possible that investors will go back to risk-on trade and revert to high perceived growth names. But at this point, the question mark remains if those growth rates will come back immediately.
How is the mid-cap basket likely to pull through the current storm?
Mid-cap businesses sometimes face talent problems in terms of attrition or they have liquidity issues. This time the problems are compounded. Some have liquidity problems, weak balance sheet, weak revenues and more. One has to be more cautious now. We have no market cap preference. Our criteria for stocks is that it has to have sufficient liquidity. Then it has to meet the valuations and management critieria.
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