What do you make of this volatility in the market?
As the world settles into a low growth phase with a lot of uncertainty, it is getting factored in. Markets are reacting to developments, both globally and locally, in terms of the policy actions. We will have to live with this volatility over the next few months, till we get a fair bit of certainty on how the Covid situation plays out and how the reopening of economies will settle down. There are concerns about a second wave, and also about how we can medically progress on containing Covid. So these are unknowns that we are all grappling with. To that extent, markets will be traders’ delight, so to say. We do not expect any significant directional move in the near term, but of course these corrections, whenever they happen, will provide good opportunities for investors to add positions. The long term outlook looks good, but the near term would be uncertain and is going to be a lot more volatile.
We had almost everybody from India Inc yesterday on the channel — from ITC to Siemens from TVS – and they all indicated to us that there is a lot of uncertainty in the short term, and growth will remain low in the medium term. We do not know about the long term, because the shape of the economy is changing. So what gives you the confidence that every decline right now is a buying opportunity?
As we build in a recovery, the first six months of this financial year will be a challenging period, but we are quite hopeful that globally and locally the world will start to live with Covid even if a vaccine or a clear drug is not found. We would need to move on in terms of opening up the economy, building in a bit of isolation for the infected people. At the same time, one will find it extremely difficult, economically and politically, to keep industries under lockdown. That is what we have seen globally, and also in India. So we believe we will need to come to terms with Covid and that is what the governments are doing.
In the mid-term, policy actions from the central banks — and wherever possible from the governments — will help put in more liquidity and money in the hands of consumers at large, so that there is not too much of bankruptcies, etc. Over the next two to three months, we will take care of balance sheets, which are little soft and prone to defaults. We would come back because this has a lot to do with the supply side. There are no industries which are working at this point in time. But there are people who have the ability to consume in spite of the fact that there are some job losses and job cuts. It is not that the whole of India or the whole of the world has lost its pay cheque. So it is a basically a little bit of a cut here and there, or a deferment which the government is also trying to address through various means.
Also the basic consumption, which is the bedrock of the economy, is still is broadly intact. As you get the industry to open up and put logistics into the system, we would have a consumption recovery in next three months. So, we are not unduly worried about the demand side, of course. There will be some slackness that we are all building in in terms of economic forecast, but I think it is more of a supply side issue, and not a demand side issue at this point in time.
How do you see the dynamics playing out when it comes to the financials? They continue to form a large chunk of most portfolios, and there is both a high risk element there as well as of course an expectation that they are going to revive the economy or lead from the front. Do you see some amount a consolidation in certain pockets perhaps that will emerge stronger than others? How do you see this play out because we have seen quite a bit of pressure even on the financials in last few weeks?
Financials have been the best performing sector over the last many years, and particularly retail-oriented banks. The current situation has definitely put the focus on the stress that could build up potentially because of the moratoriums during the lockdown. We believe financials as a sector would underperform in most rallies in the near term. Markets and investors will readjust to a lower exposure to financials, particularly lending institutions, which are having a weak liability profile. Typically, these are the low quality NBFCs, which do not have a liability franchise. So these wholesale-funded institutions will find it extremely difficult to remain relevant. When their asset side gets stressed, they would be the companies to avoid or the sectors to avoid.
We believe financials exposure in the medium term would gravitate to the well-run large private banks and a few quality non-banking financial companies, and more towards the insurance-oriented plays. That is the change within the financial composition of investors that we see. Overall, we see exposure to financials coming down for investors at large, particularly for institutional investors. There are other sectors which have been out of flavour for long, they are coming back as profits of those companies and the sector are improving, particularly in pharma etc. So there is a clear shift in terms of a leadership away from financials over the medium term.
Within the larger private names, do you see some kind of upsets even there? Do you see just a couple of leaders emerging, because all this while we have had perhaps a handful that continue to be the market favorites. Do you see any change even there?
Clearly the larger and well-run banks are getting stronger. They are the ones with liquidity and they are the ones with good liability franchises. We do not see a major disruption in the top-tier banks in general. It is more of the mid-tier and smaller ones that we are probably worried in terms of growth trajectories given the current stress and also the capital position of these companies.
Would you say IT is also resilient to what is going on in the world? Because in the recovery, IT also will be fastest to bounce back that is pretty much what we have heard in terms of a commentary from most IT majors as well. TCS said there is going to be a recovery by year end, NIIT Tech seems to be indicating just that, saying that it could see a single-digit decline in June quarter before recovery coming in September quarter. We have just heard from HCL Technologies, which delivered its numbers. The earnings are for the quarter gone by wherein Covid hit only the latter part, but the company is largely resilient in terms of earnings.
The IT space is definitely going through its own challenges in terms of the work at office or work from home framework. On the demand side, we believe and understand from a lot of consultants and from companies that there is sharp decline in terms of intent to start new projects, scale up existing projects and also talk about new initiatives. To that extent, I think growth is going to be muted. But we need to look at this small negative growth vis-à-vis the kind of hit that other sectors are taking. So relatively speaking, IT is an area where balance sheets are very good, demand conditions are not dropping off the cliff from a one-year perspective and there is a lot of cost savings that the companies are able to wriggle out. So incrementally, there is very good chance that more money will flow into software companies pretty much across large and midcap segments, given that there are a lot of initiatives and niche areas that small or midcaps are working on, including digital and cloud, and a lot of them have very good competitive advantages to build into the current weakness in the market.
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This market will be traders’ delight for some time: S Krishna Kumar have 1489 words, post on economictimes.indiatimes.com at May 7, 2020. This is cached page on VietNam Breaking News. If you want remove this page, please contact us.