Economic recovery may be protracted over Covid-19: Head of equity, Axis MF

Fear of contraction has kept demand low, especially across the services sectors like airlines, hotels and events, says Gopani

Corporate earnings are likely to remain subdued as the coronavirus jolt has impacted sentiment negatively, says Jinesh Gopani, head of equity at Axis MF. In an interview with Ashley Coutinho, he says companies that have rebuilt themselves amid adverse market conditions will be the likely winners of 2020. Edited excerpts:

What do you make of the current correction in the market?

Globally, we have seen several market moulds breaking as a fallout of the coronavirus contagion. Concerns over a longer term demand collapse have threatened depression-like conditions in many advanced economies. Macro analysts globally have rushed to cut growth estimates as well, leading to turbulent markets.

Domestically, India has been relatively immune due to the limited linkages to global supply chains. Pressure points on our economy are domestic in nature, and the market fall could be a good time for investors to selectively deploy incremental funds.

How expensive are we now in terms of valuations?

The fall since the beginning of the year has certainly helped with valuations. Risk assets in general have seen an across the board selling by foreign investors in line with the rest of the EM basket. A point to note here is that the domestic investor has continuously bought the dip. From a valuations standpoint, India now trades close to 17 times its one year forward price to earnings multiples, the lowest in two years. 

What is your view on mid and small-cap stocks?

Mid and small caps have seen deep price corrections and are available at reasonable valuations. The market has differentiated between companies with earnings capabilities and those without. There is limited scope for catch-up as valuations are largely similar for large, mid and small-caps at this juncture. Only those investors looking to put in the time to research stock ideas should look to invest, especially in the mid and small-cap names.

We are in the midst of a slowdown. What is your reading of the situation?

The recovery is likely to be protracted as the coronavirus jolt has impacted sentiments negatively. Fear of contraction has kept demand low, especially across the services sectors like airlines, hotels and events. A lookback at previous pandemic cases shows similar trends. The Indian economy is on a relatively stable footing as of now. The government is also proactively managing the situation. We should see green shoots sooner rather than later.

What is your view on corporate earnings growth?

Corporate earnings have remained subdued as the excesses have been corrected. Companies which grew aggressively without factoring the business case have suffered. The NPA crises, commodity cycle and problems in telecom have all been results of poor business strategy.

These are now slowly getting resolved. The bankruptcy code and debt resolution process has expedited recoveries to banks and financial creditors, the excess capex situation in metals & mining and basic materials space seems to be correcting itself and telecom has seen rationalization of revenues.

The economy has to adjust to the new regulations and business fundamentals. The government has rolled out several stop gap measures to alleviate pressures on industry but has not been able to spend its way out of a weak demand environment owing to fiscal limitations.

Companies that have rebuilt themselves amid adverse market conditions will be the likely winners of 2020. For such companies, 2019 was a catalyst to become leaner, focus on core businesses and improve efficiencies in operations and finance.

What is your view on banking and NBFC stocks?

With Yes bank going into RBI administration, there is heightened uncertainty and pessimism. Banking is a business of trust, and if an institution loses that trust, it will become difficult to run.

The large well-established names of the business continue to grow at a steady pace and are reasonably valued. These companies will remain beneficiaries of the India growth story and will be able to capture market share both in the underpenetrated markets as well as markets where they can fill the void left by companies scaling back operations due to lack of funding.

Which sectors are you betting on?

Consumer names with strong brand recall and healthy earnings growth have been seen as safe havens in an otherwise tough market and weak economic environment.

We are underweight on the metals and mining space largely on account of the weakening commodity cycle. Given that the global economy is facing multiple headwinds and growth across key drivers like the US, Europe and China wanes, the outlook for the sector looks pessimistic. Oil and gas is part of a call to avoid risks emanating from the wider commodity complex. Given geopolitical tensions and policy risks, we remain underinvested in this sector.