Yesterday's laggards may be post-pandemic winners: IDFC AMC's Anoop Bhaskar

In a Q&A, the head-equities, Fund Management at the firm, says companies have proactively cut costs, so there may be a positive surprise on the margin front

With valuations no longer compelling, market corrections should be evident going ahead, says Anoop Bhaskar, Head–Equities, Fund Management, IDFC Asset Management Company. In an interview with Ashley Coutinho, he says small and mid-cap segments may reverse their underperformance if the pandemic does not register another peak and the economy revives. Edited excerpts: 

Indian equities have seen a sharp rebound from their March lows. The rally seems to be divorced from ground reality as the economy is likely to contract this year. What is your assessment of the same? 

The current market situation cannot be viewed in isolation from the lows made on March 23. If viewed from January 1 this year, all market indices are flat to negative. While economic activity has been impacted by the pandemic, most economic forecasts today are less bearish then the one made initially in April and May.  In addition, a massive liquidity injection through loose monetary policy as well as large fiscal stimuli by US, EU and Japan have positively impacted equity markets. The combination of lower economic damage combined with higher liquidity has acted as a booster. With valuations, no longer compelling, market corrections should be evident going ahead.

What are your views on mid and small-cap stocks at this juncture? 

A. In the limited historical perspective available for Indian markets, small- and mid-caps have outperformed during periods when economic activity revives after a period of economic upheaval and/or slowdowns. Small-caps did as well or better than the Nifty between 2002-04, 2009-10, 2013-14, periods when economic activity picked up.  If economic cycle has bottomed out, as is the view currently, and the pandemic does not register another peak, then small and mid-cap segments are well placed to reverse their underperformance of CY18 and CY19 in the coming years.

A few stocks have gained sizeable weight in the benchmark indices. How are fund managers navigating this problem? 

This is not a problem confined to India, it’s a global issue. Even the S&P 500 is registering higher concentration at the top, similar to CY 2000. As money has poured into index funds, indices have slowly become more concentrated. Maybe a pointer to active fund managers would be to look at a country like South Korea, where Samsung lords over the KOSPI, the key market index in Korea, with a weight in excess of 20 per cent. If active fund managers can survive in Korea, Indian managers should not just survive but thrive in India.

Which are the sectors or pockets of the market that you like in the aftermath of the pandemic?

A. Sectors which could benefit post-pandemic have underperformed during the first phase of the market uptrend. This includes cement, auto and auto ancilliaries, banks and consumer discretionary, especially fashion retail and hospitality.

What are your views on corporate earnings?

FY21 earnings will have a lower impact than management commentary on demand in the coming quarters. After the Q1 FY21 earnings debacle, to expect YoY growth would be a meaningless exercise. However, companies have been proactive in cutting costs, including promoters cutting their salaries by 35-50 per cent. Expect positive surprise on the margin front.

What are the key global cues to watch out for?

Any delay in declaration and acceptance of the results of the US Presidential elections could impact the markets. China and the possible geo-political flare ups with India or territorial issues in South China Sea are developments to watch out for in the coming quarters.

Has the pandemic made the job of active fund managers more difficult, given the heightened economic uncertainty and disruption in near term earnings growth? 

Given the impact of lockdowns on economic activity, Q1 FY21 earnings, not surprisingly were dismal. Thus, P/E for FY21 and first half of FY22 will look elevated. In such a context rather than coming out with a new valuation metric, it would be more sensible not to compare current valuations in a historical perspective. Investors will focus more on the “glide path” towards normalcy. As is evident, sectors where Fy 20 earnings will be crossed in FY21 itself have been the early winners followed by those which will take longer.  Clearly, the market has been very rational on this aspect, no company or sector where earnings can take Fy 22 or Fy 23 to cross FY20 level has outperformed their underlying indices during the rally in the last six months. What will have to be considered would be the higher valuation multiples for the same level of earnings as earlier till the current gush of liquidity normalises.