‘An opportune time to invest in markets’

Clarity on economic recovery to unfold over 2 quarters: Reliance Securities CEO

Markets are likely to remain volatile with a downward bias as COVID-19 will continue to impact companies; the current fiscal is set to be a washout in terms of earnings, said Lav Chaturvedi, ED and CEO, Reliance Securities. Interview excerpts:

Do you think the stock markets have reached their bottom?

Given the current economic scenario and ambiguity over corporate earnings, market momentum will remain volatile with a downward bias.

From a valuation perspective, Nifty currently trades at 21.5x of earnings and 2.7x of book value, which looks to be fairly valued. However, given the about 17% contraction in IIP for March 2020 and expectation of a persistent decline in subsequent months, earnings growth visibility looks cloudy.

Hence, a contraction in markets cannot be ruled out. Other than earnings, the market, in the short term, would be driven by foreign flows and execution of the stimulus package.

What factors will dictate market direction?

In the near-term, how effectively the government executes its hefty economic package, progress of the ongoing lockdown — especially in red zones which contribute over 50% to India’s GDP — the RBI’s likely reactions to absorb additional liquidity from the markets after the Centre increased its borrowing target for FY21 by over 50% and the likely impact of the mammoth package on the government’s fiscal health would be the key factors that market participants would be keenly watching in the forthcoming days. Further, corporate earnings and management commentaries on business fundamentals will be the key monitorables.

Given the current scenario, what avenues can a retail investor look at to invest?

For retail investors, direct equity and mutual funds / ETFs (especially SIPs) are always the preferred mode of investment. The market is still down by 25% from its 52-week high seen in January 2020, which made valuations attractive for a number of mid-cap companies that maintain strong corporate governance, healthy balance sheets and which generate strong cash flows. One should look at value stocks that have a high margin of safety and can generate higher delta in the next 1-2 years.

In the current context, asset allocation should be made for gold too, anywhere from 5% to 15%, based on overall risk appetite.

After record outflows in March, FPI selling slowed in April though they still remained net sellers...

The government’s recent move to increase the FPI limit in domestic firms and recent dialogues for attracting more FDI after sensing an opportunity from shifting of base from China to other countries by several global companies bode well for FPI participation in the long run.

However, we are skeptical about FPIs turning net buyers in the near term, given the deterioration at the macro level and possible repercussions on sovereign ratings. FPIs would wait for clarity on the Centre’s financing and on corporate earnings’ prospects.

What impact of the lockdown do you see on corporate earnings in the June quarter?

[The] June quarter may be the worst [for] corporate earnings [going] by management commentaries for several corporates and the channel checks done by our research teams. While we are seeing partial resumption of economic activity, which may be further eased, it may take a couple of months to bring economic activity to the pre-lockdown level. We should also not forget we are still seeing a steady rise in new COVID cases, especially in red zones where a significant easing of restrictions is doubtful.

How long would the impact of COVID-19 be visible on the stock markets?

COVID-19 will continue to hurt investment sentiment globally and domestically, at least till vaccines and drugs are commercially available.

We have already started witnessing the second wave of COVID outbreaks in cities that reopened recently.

Undoubtedly, FY21 is going to be a washout fiscal from a corporate earnings perspective. Even for FY22, there is ambiguity over the quantum of potential earnings recovery. Clarity will emerge over the next couple of quarters as to whether we are looking at a V-, U- or L-shaped recovery both for the economy and the market. In any of the scenarios, it’s an opportune time now to begin investing in markets.