With the market at an all-time high, VAIBHAV SANGHAVI, co-chief executive officer, Avendus Capital Public Markets Alternate Strategies, tells Puneet Wadhwa in an interview the expansion of valuations may lead to an intermediate market correction, which can be short, swift and sharp. Such dips, he says, will be a good opportunity for an investor looking to enter or increase allocation. Edited excerpts:
Can the markets undergo a time-wise/price-wise correction now?
Predicting 2021 would be hazardous without putting in caveats for any potential disruptive event, like Covid-19 in 2020. That said, we may be at the start of an upcycle for growth in gross domestic product (GDP), as well as corporate earnings. This also needs to be factored in along with the liberal fiscal and monetary stance across the globe, leading to massive liquidity and potentially higher inflation. Because of all this, as against investors’ disbelief on this current performance, the markets may continue to do well.
The expansion of valuations, led by liquidity, may lead to an intermediate market correction, which may be short, swift, and sharp. But, that will be a good opportunity for an investor looking to enter or increase allocation.
When there is a broad-based market recovery, generally, we see most sectors performing, albeit on a rotational basis. Investors may try betting on sectors which may show the strongest recovery and also a pack of value sectors and stocks where potential unlock may lead to better performance. The market leadership — rather than changing for a prolonged period — may remain dynamic.
What has been your investment strategy since March 2020?
Our investment approach always begins with an assessment of risks. 2020, was a year of risks hitting us both ways; Covid-19 on the downside and the subsequent sharp recovery on the upside. As a principle, we generally are not adventurous in such a volatile environment and, hence, stayed low and nimble in our approach.
For 2021, as the fundamental recovery shapes up, our exposure is likely to be on the higher band of our long-term averages. We remain positive on reform-centric stocks and sectors, consumers, real estate, information technology (IT), and private banks. Non-banking financial companies (NBFCs) and public sector banks may underperform.
How are foreign investors viewing India as an investment destination within emerging markets (EM)?
While the MSCI rebalancing is done with, the dollar continues its downward streak leading to a weak Dollar Index. This in all likelihood may continue to attract FPI inflows, though not with the same quantum and ferocity that we witnessed in this quarter. Within EMs, India is positioned well as we see some reallocation happening because of the blacklisting of Chinese firms by the US. Also, the government reforms have compelled many investors to look at India afresh.
How long do you see central bank policies remaining accommodative?
The Reserve Bank of India (RBI) has been very consistent in its approach towards maintaining system stability and aiding recovery via unconventional and very effective targeted measures. Inflation forecasts suggest we are unlikely to see any big change from the accommodative stance. That said, we also do not expect any further cut in rates. The support is likely to continue until growth improves and after that, is where we may expect some withdrawal of the unconventional measures. Thus, interest rates with this abundant liquidity are likely to remain range-bound, and which may attract global funds to invest in search of yields.
What’s the outlook for corporate results over the next few quarters?
Corporates have utilised this crisis and turned it into an opportunity to cut costs and become lean and efficient. Because of this, when business is back to normal, we may see these efficiencies lead to better margins and improved earnings over the next two years. Recovery may be led by banking and finance, consumer discretionary and industrials.
Should investors still hold on to defensive plays in 2021?
As far as earnings get delivered, investors will keep chasing whether it is defensive or not. The IT sector is on good earnings upcycle; FMCG will be as consistent as it has always been.
How big a threat is the rise in commodity prices to recovery?
Commodities for us have always been a tactical play. If global growth is catching up speed, we may see the buoyancy in the base metal prices continue, which will help metal and mining stocks to perform. Commodity prices have spiked and have the potential to hurt margins in a few industries, while it benefits them. At the same time, it aids inflation.
While in the initial stages, it wouldn’t be much of a worry, if it sustains for long then we will have to take it as a risk factor.