Market valuation not as attractive compared to March'20: Satish Ramanathan

Systematic investment plans (SIPs) will be the preferred mode of portfolio building at this juncture, he said

With the second wave of Covid-19 denting investor appetite, SATISH RAMANATHAN, MD and CIO – Equity at JM Financial Asset Management tells Nikita Vashisht that investors must build their portfolio with large-cap and midcap along with offshore funds to tide through the current volatility. Edited excerpts

Do you see further more market correction over the next three months?

The sudden surge in Covid-19 cases has derailed expectations and growth to some extent.  However, a supportive and pro-growth Reserve Bank of India (RBI) offers relief. We believe that it is too early to call a slowdown and are in the wait and watch camp. If the surge in coronavirus cases continues or there are forced lockdowns, which inhibit economic activity, then we believe markets will cool off, given the high expected growth rate and valuations.

What could pull the markets out from the current phase?

Attributing market recovery to only fiscal and monetary policy support would be inadequate as India Inc did its bit by cutting costs and improving efficiency. This trend was observed globally, as companies realised that business could be conducted online or with a tighter cost structure. Companies in India, too, reduced wage cost but did not lay off people which helped in the recovery. However, it is the SME segment that we are worried about for the longer-term impact. In the event of a second lockdown and slowdown, we do not expect a similar V-shaped recovery to necessarily play out, as the base effect turns unfavourable and the pent up demand is no longer present.  Further, market valuations are not as attractive as they were in March 2020.

Outlook for foreign portfolio (FPI) flows into equities?

They will be weak due to coronavirus issues, but will improve once these fears are behind us. In terms of growth and potential, India still offers one of the better markets globally. So, FPI inflows will continue to hold or improve when sentiments become better.

Will 2021 be the year of defensives again? 

Defensives will continue to do well and help in a volatile environment. The three classical defensive industries – pharma, information technology (IT) and consumer – will continue to demonstrate high cash flow conversion.  However, we are also seeing other sectors fitting this bill such as commodities and industrials. Supply chain disruptions and a stress to localize across the world is helping in margins moving up across sector. It is too early to make contra bets, as the markets have not corrected significantly. That said, we believe chemicals, industrials and commodities will continue to recover and gain strength, apart from defensives.

How big a risk are inflation and bond yields now?

The RBI has rightly waited to make inflation as key risk, when growth could falter due to second wave of Covid-19.  The bond market is at an interesting place, as there is an absence of borrowers in, both, retail and corporate and the only borrower is the government. 

Inflationary concerns are definitely an issue if growth sustains in China and the US does embark on an infrastructure spend. This is at a global level and in the domestic economy while inflation will nudge up, Covid-19 fears will dominate the bond market for the short-term, which implies there could be a downward pressure on yields.

Suggestions for investors to tide through the current markets?

While we recommend equities with a blend of large-cap and midcap along with sectoral funds (some offshore as well), one should be prepared for bouts of volatility. Systematic investment plans (SIPs) will be the preferred mode of portfolio building at this juncture. We also recommend investors maintain a higher level of liquidity as the unknowns in the pandemic are increasing and one should be quick enough to use sharp corrections to their advantage.

Will FY22 earnings estimates be downgraded going ahead as Covid second wave dents economic recovery?

March quarter earnings of fiscal 2020-21 (Q4-FY21) have actually been in line, as there was a pent up demand in Q3, and hence a sequential drop was expected. Earnings growth rate will continue to remain robust in Q4FY21 and Q1FY22 as well. What is encouraging is the reduction in debt and interest costs, improved efficiency and higher margins. However, sales growth may disappoint due to Covid-led issues. In terms of efficiency, we are at a level not seen over the past five years.