Stock markets have been in a tailspin. Some, including those in India, saw steep falls never seen before, worse than the 2008 financial crisis. After the sharpest-ever drop on March 12, the Sensex breached the 26,000-mark on March 23. As investors try to adjust to the new normal, portfolios have been bleeding red. So, should they sit on the fence or dive in? Founder of Abakkus Asset Manager, Sunil Singhania believes it is time to embrace volatility by spreading out investments and buying in tranches. In this exclusive interview with Outlook Business, the market veteran discusses how deep the wound runs, time needed for the market to recover and where investors could take cover to benefit from the crash.
Can the current volatility be compared to previous market crashes?
This is an once-in-a-lifetime event. We have never seen a complete lockdown in our lives. People are scared and there is uncertainty with respect to how this virus is spreading. We haven’t ever seen this kind of volatility in the market. The intensity and speed of the fall have surpassed all instances over the past century. US and Indian markets fell by 30% in a matter of days, not even months.
Do you think the market has bottomed out or is the recent surge a relief rally?
In the near term, the volatile movement of the market is a reflection of panic. News flow related to coronavirus, both positive and negative; technical factors; and demand and supply are triggering the moves. We moved higher after falling below the 8,000-mark. There was overselling, which then corrected to some extent. We may see 5-10% movement on either side for the next couple of weeks.
What kind of economic relief package could the market expect from the government?
The social package announced by the government was quite elaborate followed by the Reserve Bank of India’s move to address liquidity, which was more than what most investors had expected. Hopefully, we might see more announcements, particularly pertaining to corporates. There are companies and businesses with zero revenue but fixed cost, which they will find difficult to pay. In terms of individuals, there will be layoffs — companies may have to let go of temporary or casual workers.
Investors have flocked towards growth-oriented stocks over the past two years. Is that likely to change going forward?
Quality stocks are good but you can’t buy them at any price. These stocks, even in the current downfall, are the ones that have not fallen as much as others. It’s surprising because, relative to the market, they have become much more expensive. And when you look at global companies in the same space, you will find that Indian quality stocks are most expensive in the world right now. If profit growth was high, you could justify a higher P/E multiple. But over the past eight years, we have seen that quality stocks have not seen more than 10% profit growth. Yes, as long as there is risk aversion in the market, these companies will outperform. But, we expect it is going to be a tough one or two years for discretionary consumption stocks, as demand drops. Even after correction, stocks in this space are trading at expensive valuation compared to their five or 10-year average. So, as things start settling down — say around the third quarter — that’s when investors should look at companies, which are more brick-and-mortar (economy).
Are you seeing any pockets of opportunity in the market?
It’s a tough call. We cannot estimate the exact impact on sectors or companies. Until then, we are buying cautiously. Companies’ profitability and balance sheets will be hit. But I believe normalisation will return gradually, even though a lot of sectors will see the impact at least for the first quarter of FY21.
The rational strategy would be to spread your buying till April-end, make volatility an ally and look at individual companies and balance sheets to figure out their sustainability. One must spot companies with low debt and fixed cost, and those that can resume operations faster once normalisation sets in.
Are there any sectors that have become even more attractive since last month?
There is still merit in looking at select pharma, chemical and metal companies. A lot of pharma, chemical and drug intermediates would see margin expansion as crude-based input prices are coming down. Once things go back to normal, the massive $5 trillion infusion by the G20 nations will help in boosting demand. I would look at companies that could benefit from loose fiscal policy globally, which include select metal, engineering or even utility companies. In an era where interest rates are extremely low, some boring sectors such as utility might become attractive.
In pharma, what are you more bullish on — domestic or US generics?
I am globally bullish and incrementally positive on this segment. After seeing five years of negative performance, we see a tailwind in the form of a depreciating rupee. Also, there is global awareness about being healthy. So, we see merit in domestic sales shooting up. Hence, overall, select pharma companies could be interesting investment opportunities.
Which sectors are expected to see the most pain? Are there any that you will avoid?
One of the biggest overweight sectors is financials, which is also seeing a massive hit, but prices have fallen much beyond the impact. We are a little cautious about select micro, consumer and vehicle finance companies. They would see some pressure because of the three-month moratorium. Consumer-facing finance companies might see some pressure in their collection and efficiency. A lot of NBFCs’ loan books are made up of unsecured consumer loans, which many people will face difficulty to pay back (EMI or credit card) as they lose their jobs or take pay cuts.
The other sector that I am negative towards is discretionary consumption. Many may be compelled to take income cuts and, even after the crisis blows over, our habits will take time to change. We will not rush to watch a movie in a theater or eat outside or even go on a vacation. So, I would be a bit careful before investing in any company in this segment.
