First-quarter earnings to be adversely hit by lockdown, here’s how to invest | Angel Broking INTERVIEW

With the nation-wide lockdown spreading over two months of the first quarter of financial year 2020-21, it is a given that India Inc’s first quarter earnings are to be adversely impacted.

With the nation-wide lockdown spreading over two months of the first quarter of financial year 2020-21, it is a given that India Inc’s first-quarter earnings are to be adversely impacted. However, the general belief is that wheels of India’s economic recovery will be set in motion by the second half of this fiscal. Vinay Agrawal, CEO, Angel Broking in an interview with Kshitij Bhargava of Financial Express Online, talks about how important portfolio diversification is amidst a volatile share market and gives his views on how long benchmark indices will remain volatile. Here are the edited excerpts.

Markets have bounced back strongly post a sharp correction. With uncertainty still at large what is your outlook on the markets from the rest of the financial year?

Despite the pullback in the Nifty from recent lows of ~7,500 we need to exercise some degree of caution especially over the next 1-2 quarters as the situation is still developing. India was just coming out of an economic slowdown when the COVID 19 crisis struck us. Given these crises followed by the lockdowns, there will be a negative impact on economic activity in the first half of the current fiscal. We expect activity to pick up from Q3 FY2021 onwards as the economy opens up gradually, though a full blown recovery will still be some time away.

In order to stimulate the economy, the Government recently announced a INR 20 lakh Cr. economic package, though market reaction has been muted given that it focuses more on credit than on actual cash spending by the Government which was the need of the hour. Also the quantum of new stimulus measures announced at INR 11 lakh cr. (~5.5% of GDP) was a bit disappointing for the markets given that it’s comparatively smaller in size to other countries like the US which has announced a fiscal package of USD 2.7 trillion (13% of GDP) so far. However we feel that our economic package will ensure adequate credit flow to essential sectors like agriculture, MSME and Power and should have some positive impact on the economy. This was followed by a 40bps cut in repo, reverse repo and bank rate on 22nd May 2020.

Despite these measures, we believe markets may remain volatile through the first half of FY2021, driven by uncertainties around COVID 19, before we see a more durable recovery in the second half of the fiscal year.

Auto indices on BSE and NSE performed really good in the month of April despite there being no stimulus package for the industry. Why is it so?

There is going to be pressure on the demand side especially for high ticket items and discretionary items like Automobiles and real estate. The Auto sector has been amongst the worst impacted due to the Covid 19 outbreak as production and dealership networks were shut down which was reflected in the April sales numbers. However, given increasing relaxation in lockdowns post the 4th and the 18th of May 2020, most of the companies are now gradually resuming production and also opening up their dealerships in phases.

While companies have started reporting some sales post opening up of dealerships, we expect that volumes will pick up gradually and getting back to the pre outbreak level is going to take some time. Sales in rural areas, which have not been impacted much by the Covid 19 outbreak, is recovering first given that there is pent up demand. Also the stimulus package announced by the Government had a clear rural focus therefore we expect auto sales to do relatively better in rural areas. Sales in Metros and large urban areas are expected to remain sluggish for some time given the negative impact due to the Covid 19 outbreak. Therefore we feel that a full blown recovery for the sector is still some time away though rural focused companies are expected to do better.

The general sense has been to stay with large-cap firms that can deal with the crisis at hand, but what about small size firms?

While it’s true that large cap stocks are better positioned to deal with the crisis given stronger balance sheets, we believe that sector allocation is the key in the current market environment. We have seen a shift away from sectors which are discretionary in nature to sectors which are more essential in nature or can benefit from digitization. Therefore given our focus on quality business where there is strong revenue visibility there are not many small sized firms in our recommendation list at this point of time. However as and when the economic recovery gathers steam we may also look at including more quality mid caps in the portfolio at a later date.

The lockdown was extended with certain riders till the End of May, what will the impact of this be on India Inc? Is the Q1 going to the worst ever for the majority, making the revival tougher?

While the Government has announced an extension of lockdown till the 31st of May 2020, it has come with much greater relaxation as compared to earlier phases of the lockdowns except for containment zones. The Government has either fully or partially lifted some of the restrictions including intra state and interstate movement of people subject to state approvals. Similarly all non essential shops are also allowed to open except for those within malls and containment zones while delivery of non essential items by e-commerce platforms have also been allowed.

There have been other minor relaxations allowed by the Government though large portions of the economy including educational institutions, malls, hotels and metro rail services still remain closed. Therefore it is a given fact that Q1 numbers are going to be impacted adversely because of the lockdowns though we expect economic activity to resume slowly from Q2 FY2021 onwards as we gradually open up in a phased manner. While there are uncertainties over the durability of the economic recovery over the next couple of quarters we feel that we should be back on a firm footing by the end of FY2021.

These are uncertain and unprecedented times, how big a role does portfolio diversification play in such a market? How should one go about it?

We believe a well diversified portfolio is the key to success for long term wealth creation. We believe that individuals should follow an asset allocation plan while investing keeping in mind their age and risk profile. Generally we recommend a higher allocation to equities for individuals who are at the beginning of their career and can take risks. The mix would gradually keep changing in the favor of debt throughout the lifespan of an individual. In the current market environment we would recommend investors to stick to their asset allocation plans despite volatility in the markets.

Within equities we would recommend a well diversified portfolio consisting of 25-30 stocks spread across sectors. In the current market situation we feel that sector allocation is the key to generate alpha and we would recommend investors to stick to businesses which are either engaged in essential activities or could benefit from increased digitization. We recommend investors to stick to sectors like agrochemicals, chemicals, FMCG, pharma, telecom and IT which have better revenue visibility and should do well in the current market environment. We also recommend investors to avoid vulnerable sectors which are expected to bear the brunt of the slowdown.

What has been your investment strategy since the middle of March when we came face to face with this crisis?  

I strongly believe that equities in the long term have a very bright future with the potential to deliver best returns across asset classes. Despite the immediate slowdown facing us, I am of the view that India will do better than many other global economies going forward. This will attract a lot of investments from both domestic and foreign investors. Current year is a one-time opportunity for investors to either enter or lever up their investments in equities. There is empirical evidence of markets bouncing and delivering very healthy returns after periods of any crises. For example, the Nifty delivered returns of 157% in 20 months to reclaim it’s all time highs in Nov’10 after falling by 61% between Jan’08 and Mar’09 during the global financial crisis. Similarly the Nifty returned 95% between Dec’11 and Mar’15 after correcting by 28% during the European debt crisis.

In the current times, it is imperative to focus on diligent sector allocation. Our investment strategy since the middle of March has been to focus on sectors which are either engaged in essential activities or can benefit from digitization. We believe sectors such as FMCG, Pharma, chemicals and agrochemicals are some of the sectors which are essential in nature and should do well given greater revenue visibility. Similarly telecom should benefit from increased data demand along with improved pricing power. We have also been recommending our customers to avoid sectors where demand will be adversely impacted due to the Covid 19 outbreak for the time being and wait for more clarity before investing in those sectors.