'Valuations in the pharma sector are not as attractive as last year'

Rising cases and lockdowns could result into small earnings downgrades across domestic cyclical sectors. Markets, says AMIT B GANATRA, senior fund manager, HDFC AMC in an interview with Chirinjibi Thapa, are in the process of crystalising and discounting FY22 earnings expectation. Edited excerpts:

How should investors approach markets now?

India’s earnings cycle has turned around positively in fiscal 2020-21 (FY21). However, markets are bound to be volatile due to both domestic as well as global factors. Hence, if an investor wants to participate in equities but does not want to bear higher volatility, they could consider investing in assets with low correlation/negative correlation to reduce risk and target optimal returns.

What should an ideal portfolio look like now?

An ideal portfolio in current market circumstances should have an optimum mix of equity, debt and gold. Within equities, the portfolio could be diversified across all segments.

Your expectations from the March 2021 quarter earnings?

Markets are in the process of crystalising and discounting FY22 earnings expectation. Based on current vaccination trends and learning from other countries which are ahead in their vaccination drive – India’s covid situation should improve in the next few months. However, in the meantime – rising cases and lockdowns could result into small earnings downgrades across domestic cyclical sectors. However, these sectors have witnessed correction from recent peaks and to that extent – pain is already being reflected in current valuations.

With the resurgence of Covid cases, can pharmaceuticals and diagnostic companies once again take the lead?

While pharma and diagnostic companies can exhibit earnings resilience during current times, their current valuations are also reflecting that expectation. Valuations in the pharma sector now are not as attractive as last year. Hence, the risk-reward is less attractive.

With commodity prices on the rise, is it the right time to buy metal stocks?

Metal prices as well as metal stocks have already seen strong rally over the last one year. Further re-rating of the sector is now more dependent on the length of the upcycle rather than further metal price gains as prices are already quite strong and have limited scope to go up further. However, if prices remain strong for a couple of years – some of the metal companies can achieve meaningful de-leverage thereby creating gains for investors in the form of debt to equity swap. In nutshell, incremental risk reward in this sector is now more dependent on balance-sheet improvement of some of the companies within the sector and would hence require patience and a strong pricing environment.

How crucial is asset allocation, especially while dealing with markets as volatile as seen in the last one year?

A well-diversified portfolio across asset classes with low/negative correlation would generally protect investors from market volatility. A diversified portfolio across asset classes like equity, debt and gold depending on their relative attractiveness based on prevailing market conditions would enable investors to generate optimal returns in all market conditions.

How will HDFC Asset Allocator Fund of Funds help investors achieve optimal asset allocation?

This is a Fund of Funds (FoF) scheme that aims to generate capital appreciation by managing the asset allocation between equity oriented, debt oriented and gold ETF schemes. The fund aims to follow a systematic and process driven approach to asset allocation with the help of financial model- based on valuation parameters. 

Even within equity-oriented schemes, the Scheme will invest in schemes across different categories. The idea is to dispassionately manage an active asset allocation strategy in a disciplined manner with periodic review and rebalancing, which otherwise becomes a challenge for investors due to emotions such as fear and greed.