We feel that India is still a stock picker’s market and there is scope for active management, and for fund managers to deliver alpha (vs benchmark index) over the long term & a market cycle (both up and down market), Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance Company, said in an interview with Moneycontrol’s Kshitij Anand.
Q) What triggered the sudden market meltdown in the week gone by that pushed the Nifty50 below 11,300 levels as well as 200-days EMA?
A) Weak macro-economic data points and high expectations from the Budget of the new government have contributed to the weak market sentiments in the short term.
The move to implement an increase in taxation by means of a surcharge on super-rich/UHNIs, and the proposed increase in the minimum free-float limit for listed companies from 25-35 percent (which can result in increased supply of equity paper in the market) contributed to the fall in the markets.
However, for the increase in free-float limit, details are awaited, and the time frame for implementation by SEBI should happen in a phased manner—for the market to absorb the fresh supply of equity paper.
Also, this move will be positive in the long term, as it will increase weight of India/Indian stocks in global indices and the liquidity in the markets.
Other factors like concerns of some slowdown in both domestic and global economic growth may also be weighing in on market sentiments.
However, the Budget has been positive for the debt markets, with the government sticking to fiscal discipline, and announcing its plans to raise foreign money via foreign currency-denominated sovereign bonds–thus putting less pressure on local market borrowings.
This has led to further fall in bond yields post the Budget, and there is scope for further rate cuts from RBI that will also help bring down the cost of capital for companies.
Q) Do you think FM’s comments on tax surcharge on super rich could result in fierce selling by FIIs in the weeks to come?
A) The surcharge will be applicable for capital gains on a certain category of FPIs, and we have already seen some outflows from FPIs (in the equity markets), post the Budget. However, we are still awaiting more clarity/details on the tax applicability on FPIs.
Q) Any big surprises or disappointments you have spotted from India Inc. so far in the earnings season?
A) The earnings season for Q2 FY20 so far has been slightly below expectations. For the banking & financial sector (which is expected to be a key contributor to earnings), credit costs have been going up, and there is some slowdown in credit growth.
However, we are hopeful of a more meaningful recovery in corporate earnings in H2 FY20, and that should be the key driver for the market trajectory, going forward.
Q) People are losing money in markets. One of the top fund managers in a letter to investors said he got it wrong. And, that is investors’ money we are talking about. Most of the funds have not given returns as one would have liked. How should investors’ structure their portfolio or what should be their strategy?
A) Yes, the benchmark Nifty index has not been an ideal representative for the market conditions lately. This is because, since 2017-end, the market has been very narrow, with only a handful of stocks contributing to most of the gains for the benchmark Nifty 50 index.
Coupled with that, the broader markets (mid/small-cap segments) have significantly underperformed their large-cap counterparts since 2017-end, and there too–the performance has been quite narrow.
With equity mutual funds/ULIPs being more diversified in nature, this very narrow market & poor market breadth has resulted in bulk of them underperforming the benchmark Nifty index over the past year or so.
However, over the longer term, bulk of equity funds/ULIPs have still managed to beat their benchmark indices by a comfortable margin.
We feel that India is still a stock picker’s market and there is scope for active management, and for fund managers to deliver alpha (vs benchmark index) over the long term & over a market cycle (both up and down market).
Q) Legends have said that long-term investors should buy the ‘fear’. Is it time to buy the ‘fear’ or in other words stocks for a long-term portfolio, say with a time horizon of 3-4 years?
A) Yes, there is a famous quote by legendary investor Warren Buffet on that. But in equity investing, one needs patience as well to see true wealth creation.
Presently, we recommend investors to systematically invest in the equities. Investors can consider making lump-sum investment on any large market dips/corrections but should have a sufficient long-term investment horizon (5 years and above).
Q) How long can the HRITHIK stocks take the market higher? Will they underperform after some time as most of them are trading at high valuations?
A) Yes, the broader markets have been quite deeply impacted (on a relative basis). With the correction in broader markets, the valuation premium of mid-cap stocks to their large-cap counterparts has come down substantially, from their 2018 beginning highs, and presently trading at a discount.
Historical long-term data shows that mid-caps generally trade at a discount to large-caps. From an investment perspective, we still prefer large-caps but are also seeing selective bottom-up opportunities in mid-caps.
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