'Markets may remain volatile and directionless in next couple of months'

Some sectors like telecom, FMCG, select consumer durables, two-wheelers, IT, and select financials etc. are likely to recover faster, Jain said

The June quarter results will be quite dispersed and cause short-term volatility in markets, and hence, investors will focus more on the commentary from the companies rather than just raw numbers, says Rajat Jain, CIO, Principal Asset Management, in an interview with Chirinjibi Thapa. Edited excerpts:

The June quarter results have started pouring in and many expect them to be a washout. Has the pessimism already been factored in?

Most manufacturing companies operated for about one-and-a-half months in the June quarter due to the lockdown with operations improving only in the second half of May and June. The markets have already built in fairly pessimistic assumptions in terms of estimated earnings in most cases, given the uncertainty. In fact, given the pessimism already built in, there may be occasional positive surprises. Hence, more than the numbers, the markets will watch for the commentary from the companies.

What was your approach in equity investments in the last couple of months?

Some sectors like telecom, FMCG, select consumer durables, two-wheelers, information technology (IT), and select financials etc. are likely to recover faster. Further, there may be an increased consolidation in the sectors and larger companies with strong balance sheets and those with better business models may gain as they get relatively easier access to capital and see better terms of trade. We have focused on these two facts while realigning the portfolio. We, as a matter of policy do not take large cash calls in the portfolio and cash levels have been low.

Given the sharp run-up from March lows, does the market have more upside left?

The rally in the markets since the last week of March has been a global phenomenon, driven by liquidity, gradual recovery in the economy as it opens up, and increased retail participation. The economic recovery is gradual and uncertainties still remain. Given these conditions, it is possible that the markets remain volatile and directionless next couple of months. However, if there is a sharp correction around the results, it may be a good entry point for investors from a medium-term perspective.

Should retail investors fish in the broader market or just stick to bluechips in these volatile markets?

For the average investor, the core of the equity portfolio should generally be a large cap or a well-diversified multi-cap fund. Around that, the investor may adopt different strategies like mid-cap and small-cap funds etc. The actual weights would depend upon each individual and their comfort with risk. Further, there can be some tactical movements depending upon the markets which inputs a qualified advisor would be able to provide.

What's the road ahead for SIP flows?

Systematic Investment Plan(s) (SIPs) flows have witnessed a marginal decline in June. This needs to be seen in the context of the strong growth witnessed in the last few years. SIPs are the appropriate investment tool for investors that helps inculcate an investment discipline, matches investment to personal cash flows like salary and also rewards for staying invested in the long term. SIPs are generally a long term trend and we see this only as a temporary hiccup.

How should one approach telecom stocks? Is the possibility of a two-horse race real?

Telecom is one sector which has gained during the current situation as a larger number of people are working from home and students are studying from home. The data needs have obviously gone up. The sector was already seeing a recovery in the past couple of quarters in terms of rising average revenue per user (Arpu). We believe this trend will continue and may even accelerate. As such, we think the three large private players should survive, though companies with healthy balance sheets and strong network capabilities may continue to gain.

What are your views on pharma and consumption-driven sectors?

Domestic pharma volumes are impacted as elective procedures are being pushed back in the current environment. However, export potential for pharma companies is improving as Indian companies put back quality issues behind them and are seeing more approvals come through.

Consumption has remained strong, especially that of essentials as people have stayed at home and discretionary spends have somewhat gone down. We think both staples and consumer durables will do well as there should be increased demand for appliances, computers, network equipment for the home, two-wheelers etc.

Are banking stocks factoring in the possibility of moratorium extension?

We think the moratorium extension is unlikely and will be surprised if that happens. However, the Reserve Bank of India (RBI) should hopefully allow for a scheme of restructuring for select sectors or smaller companies/ businesses.  

Does it look like India Inc can shake off the Covid-19 blues by the end of FY21?

Based on what senior medical professionals are saying, Covid-19 should significantly moderate by end of the year. However, the economic effects in terms of recovery of jobs, recovery of operations for small businesses etc.  will be more long drawn and full recovery may take H1 FY22 at least.