Wary hedge fund managers aren't buying into rally in Indian stocks

Hedge fund managers in India are joining global peers in preparing for another rout in equities, as the rally in local stocks overlooks the pandemic and a dim economic outlook.

The cautious stance has cost some professional investors so far as the S&P BSE Sensex index has rebounded 35 per cent from a March low, helped by a flurry of stimulus measures from the government and the central bank. But the jury is still out with the International Monetary Fund cutting India’s economic growth outlook for the year to March by the most among all major economies.

“Liquidity is covering up underlying pain in terms of both economic growth and corporate profitability,” said Vaibhav Sanghavi, co-fund manager of Avendus Absolute Return Fund. “We will stay in a relatively hedged position, and not take any long call on the market until there’s a clear signal about treatment or vaccine for the virus.”

Moving into cash before the meltdown helped Avendus, India's largest hedge fund with Rs 5,000 crore ($662 million) in assets, limit losses to about 1 per cent in March versus the 23 per cent swoon in the Nifty50. While Sanghavi has begun to invest some of that cash, the net exposure is still at 5 per cent, versus an average 20 per cent the manager has typically taken over the last few years.

Avendus isn't alone in bracing for another selloff. Vijay Krishna Kumar, who runs the IDFC India Equity Hedge Tactical Fund and India Equity Hedge Conservative Fund, is pivoting to high-dividend companies in the utilities and energy sectors. He is skeptical of the rally in some consumer-facing stocks as the recovery in growth is still some way away.

"The damage is deep and pervasive, and even more so for emerging markets such as India, which are still in the first wave of coronavirus infections and may take longer to open up fully," said Krishna Kumar.

India has the world's fourth-highest number of virus infections and its spread prompted states including Maharashtra, home to the finance hub of Mumbai, to extend the lockdown curbs imposed since March to beyond June.

One of India's newest long-short funds is betting the stocks rally will extend. Launched in August, the Rs 300 crore ($40 million) True Beacon One fund, run by Nikhil Kamath, has cut its bearish wagers since the middle of March and is now fully invested. "The selloff has priced in much of the pandemic’s impact and is undervaluing many firms that will continue to grow revenue and operations even in a muted global environment,” Kamath said.