Investing in stock market these days requires a lot of conviction. To err may be human, but that doesn’t save fund managers, even the storied ones, when a few bets go awry. Investors expect a lot, and most of it is centred around not bearing any loss (while expecting positive return). With the COVID-19 outbreak gripping the Indian economy in a bear hug, predicting earnings growth is like looking into a wind-shield during a downpour. RupeeIQ’s Kumar Shankar Roy talks to Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance, who shares his insights on how the market and the economy are shaping up.

Reddy, who leads a strong team of fund managers overall managing Rs 60,000 crore, is positive on FMCG sector and bullish on pharma, while liking IT sector and select private financials. While he has been deploying money in equities amidst correction, reducing cash exposure, Reddy remains slightly wary because the markets have experienced a initial recovery that is quite swift but major market corrections in the past (like dotcom-com crash, global financial crisis etc.) have shown that initial bear market rallies have been followed by a second or third round of market correction. Read on.

Q: Every week of lockdown shaves off Rs 2 trillion in GDP of India. How much of this lost GDP can be recovered once the lockdown period ends and things get back to normal? Or, is this a permanent loss?

A: IMF in its April 2020 World Economic outlook cut India’s growth rate sharply to 1.9% in FY21 (from ~6% growth forecast earlier), but it expects GDP growth for India to pick-up sharply to 7.4% in FY22. Some brokerages and agencies have further cut India’s growth rate to flattish or negative for FY21, once the national lock-down got extended to May 3, 2020 (but with a sharp recovery expected in FY22). The quantum of economic slowdown & how much of the GDP will be lost will depend on how long the lock-down continues, as that impairs economic activity.

Some of the economic output will be permanently lost, but a bulk of it will gradually recover once lock-down is lifted. But it’s not like the economy will be back to 100% immediately post the lock-down. The recovery will be gradual one, and once the Corona-virus pandemic/outbreak is in full control, then we may see an acceleration in economic growth and resumption of economic activity to normal. Markets, of-course, will start discounting that well in advance.

Q: If India loses Rs 12-15 trillion GDP during coronavirus lockdown, what will be the impact of this loss on corporate earnings in Nifty? How much of this loss is priced in stock prices and how much is left?

A: It’s difficult to predict corporate earnings growth in a developing and uncertain scenario like this—especially considering that corporate earnings growth projections by the market has gone quite wrong for past 4-5 fiscal years.

Before the start of the pandemic we seemed to be in a recovery phase of corporate earnings growth. However, we are likely to see significant downward revision of corporate earnings growth for FY21–probably flattish to lower single-digit growth during the fiscal year.

In the near term (where there is slight more visibility) corporate earnings growth for 1-2 quarters are likely to be a wash-out, with some recovery in the second half of FY21, provided the COVID-19 outbreak comes under control.

Q: After stimulus in the global financial crisis of 2008-09, India’s fiscal deficit widened to 6% of GDP in 2008-09, double of what was mandated by the Fiscal Responsibility and Budget Management Act. In 2020, how much room does the government have to give stimulus and, more importantly, will that be enough given that Covid-19 is a health + financial crisis?

A: There is an escape clause in FRBM (to breach fiscal deficit target) in events such as these; and in a severe economic scenario as such, recovering economic growth takes precedence over fiscal discipline. We are likely to see fiscal slippage, even without any fiscal stimulus, as government revenue collections have dropped (due to drop in economic activity) and nominal GDP (which is the denominator in fiscal deficit) is expected to be lower than projected earlier. The government till now (April 25) has announced a fiscal stimulus package of 0.7-0.8% of GDP for the underprivileged sections of the society as they are the most impacted by the lock-down and need immediate assistance.

However, more fiscal stimulus is required from the government, and we expect that to come from the government in a calibrated manner. During the global financial crisis, we have seen the central fiscal deficit being expanded from 3.4% of GDP in FY07 to 6.1% in FY09 and 6.6% in FY10—so that was quite a large and extended fiscal stimulus. We are not saying that the fiscal stimulus needs to last for so long (as it can be damaging in the long term for the economy), but in short-term it is required—to help aid the economy and prevent a severe shock.

Q: Stock markets have shown some initial recovery in the last few days. Why is this happening?

A: Indeed, the initial recovery that we have seen, has been quite swift. But past major market corrections in the past (like dotcom-com crash, GFC etc.) have shown that initial bear market rallies have been followed by a second or third round of market correction.

We don’t know if that will happen in this scenario, but if the COVID-19 outbreak continues to escalate or if the lock-down is further extended, then we may see some further short-term market volatility.

As we know, it is difficult to predict or time the market bottoms and tops accurately. However, historical data has shown that investments made in challenging times have been quite rewarding for investors over the medium to long term. Therefore, we have been advising investors to increase equity allocation by gradually deploying in equities (as per their individual risk profile) amidst this market correction.

Q: A lockdown of the scale we are going through means many industries have zero revenues, while fixed costs result in cash burn. Which sectors or companies are better-placed in this scenario? And, do these shielded sectors’ valuations today make them safe bets?

A: We have been positive on the FMCG sector because consumers are still buying staples, soaps, and other essentials amidst the lock-down.

We continue to like select private financials (even though if the economy sees a severe shock, we may see some concerns of rise in NPAs—therefore we have to be selective). We have been bullish on the pharma sector, which looks better poised in this scenario (of a health crisis) and valuations still remain quite reasonable.

We also like the IT sector, and although the global economic slowdown will have some impact on growth, the rupee depreciation will benefit the sector and margins have still been good for IT service companies.

Q: In this extremely weak and volatile market, what are the changes that you have done for the Bajaj Allianz Life Insurance equity strategy? How much have you invested more in equity to take advantage of the decline in stock prices?

A: We have been deploying money in equities amidst this correction and reducing our cash exposure. Our investment strategy doesn’t really change and we follow a disciplined investment philosophy with a long-term orientation in our approach.

We focus on Growth at Reasonable Price (GARP) strategy. We typically invest in a ‘business’ and not a ‘stock’ and try identify ideas where the business opportunity size is large.

We follow a bottom-up research process, which helps us to identify the best ideas across sectors, and in superior stock selection—which is the key contributor to alpha generated over the long term. We look for companies with strong competitive advantage in terms of brand, distribution reach, cost advantage and barriers to entry. We also prefer companies with good corporate governance and a competent management team.

Some of the key metrics that we look at in identifying businesses are higher Return on Equity (ROE) / Return on Capital Employed (ROCE), healthy free cash flow, moderate leverage (debt), earnings growth visibility, and attractive valuation.

Q: How have your ULIP funds performed vis a vis their benchmarks? Please give an idea of their short-term and long-term performance post the sharp correction in NAV.

A: Our funds have consistently managed to outperform their benchmark indices over various periods. Most of our key equity funds are presently rated 5-star (top 10% of peer category) by Morningstar, and independent fund rating agency, and historically too have consistently been 5/4-star rated funds. This indicates superior risk-adjusted performance over the long term, and also ability to protect downside risk when compared to peer funds.

In a volatile asset class like equity, protecting downside risk (during market downturns) is equally important (or more) as performing well during a market up-turn. Our funds have managed to protect downside risk relatively, and also fared well in up-markets—thereby outperforming by a healthy margin over a market cycle (and the long term). This is important for longer-tenure products like ULIPs. Even in the recent correction in markets due to COVID-19, our key equity funds have fallen relatively less than peer funds and the benchmark index.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].

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