A fresh round of selling cannot be ruled out: Harshad Patil, Tata AIA Life

Markets seem to have more or less discounted the financial performance of the April – June 2020 quarter, says HARSHAD PATIL, senior vice-president and chief investment officer at Tata AIA Life Insurance in conversation with Puneet Wadhwa. Edited excerpts:

Are the markets out of the woods or do you expect a fresh round of selling once corporate results for the April - June quarter start tricking in?

Markets seem to have more or less discounted the financial performance of the April – June 2020 quarter. The economy, for a large part of the quarter, was under lockdown, and hence the performance of companies would be muted. Markets have seen a risk-on rally fuelled by strong global liquidity. However, the possibility of a fresh round of selling on the back of domestic economy and/or geopolitical issues, cannot be ruled out. There could also be the emergence of the second wave of the Covid-19 pandemic globally, which may trigger a fresh round of selling. That said, the markets believe that both India and China would look to de-escalate the geo-political tension through a process of dialogue and undertake meaningful steps to prevent any escalation.

What has been your investment strategy amid the developments?

Overall, we haven’t changed our core investment strategy and continue to focus on companies that have balance-sheet strength to withstand economic shocks. There are pockets of improvement in the sectors that have remained largely insulated from the lockdown effects; and expect sectors such as specialty chemicals, pharma, and rural themes to show stable earnings in this fiscal. We prefer not to take aggressive cash calls.

How concerned are you with the sharp rally in equities without a supporting pick up in corporate earnings in a weak economic environment?

Markets usually tend to focus on the future earnings rather than the current period, which would expectedly be tepid as parts of the economy were in lockdown. The end of pandemic-related economic disruption is the key unknown which will shape the trajectory of the economic recovery, going forward. Moreover, given the moratorium provided by Reserve Bank of India (RBI), the true picture of the current state of the economy in terms of defaults/restructuring of debt, etc. would emerge only post September 2020. Hence, the pace and the extent of recovery in the future would be a key barometer of the market sentiment.

What is the road ahead for fund flows into equities as an asset class?

Global flows will depend on the global risk-on sentiment, fuelled by abundant liquidity on the back of ultra-low interest rates and extraordinary liquidity infusion by the global central banks as a response to the economic disruption from the pandemic. Domestic fund flows should be good as well, given the falling interest rates as well as the weak real estate sector limiting the investment opportunities available for investors.

Has the sell-off in March shaken investors’ confidence?

Markets offer opportunity from a medium-term horizon given the expectations of a recovery post lockdown, efforts by the government to revive the economy as well as lack of investment opportunity in other asset classes. The sell-off in March was largely on expected lines given the uncertainty of the Covid-19 pandemic and the impact of the lockdown on the economy. Investors with a long-term view and a reasonable risk appetite could benefit from such drawdowns by staying invested and opportunistically adding to their investments.