India market outlook: Expect period of high market volatility to continue for next 12 months: Emkay Global

Let me put together the news and the views. The news is that there is no medical breakthrough, the economy is not going to come back to normalcy for next three to four quarters and FII flows have been here and there. The views which you have got from every corporate is that they are not in a position to give any guidance. So if news and views are negative, why are markets holding so strongly?

Let us look at it this way. Today what markets are discounting is the past of the corporate. So markets are basically past the corporates and historical perspective; so whenever the markets have corrected very sharply, they have made a comeback and the comeback is typically led by the large corporate or the leaders which are there. So what we are seeing now also is that there was this fear and rightly so in terms of the pandemic and the markets corrected very sharply from 12,500 odd to 8,000 and 7,500.

Then there was some kind of an introspection in the market participant in terms of what is the underlying value of the various businesses and you believe that many of the businesses do have the financial strength and the visionary capabilities to navigate the uncertain future and investors have a fixed allocation in terms of their equity debt.

So whatever is the equity allocation, many investors are keeping true to that and within that, there is a portfolio churn which is happening. So this rally is more a rally because of the post sharp correction and also reflective of the underlying fundamentals of many of the large corporates who are possibly going to be winners over a longer period of time. As you rightly said, do any corporates have any visibility in terms of the next 12 to 24 months about their business? Possibly no but the fact remains that investors tend to believe that these are the corporate who will innovate and who will be able to cross the hurdle whenever it comes. So I think that is what is reflective and rightly so.

We had a couple of market experts on the channel yesterday and they said this is a bear market rally; so do not get excited. If you missed it, do not worry. Markets will come down; the train has not left the station. What are you telling your clients who are asking a simple question, has the train left the station?

No, I think the smartest thing in the market always is that you should never feel left out. At every point of time, there will be opportunities for investors to invest in; so it does not make sense to chase stocks until and unless the valuations you feel are in your comfort zone. So what we are saying is that okay, there has been a rally from 7500-8000 to 9500; so that does not mean that we chase stocks accordingly. I think there will be corrections going forward as more and more data points come forward in terms of the impact on the domestic economy and how the global economy is shaping up. So we will be in for a period of lot of volatility in the next 12 months at least.

But I think within that, the trick is all about, are you invested in the right sectors or the right stocks? That is where a successful investor will distinguish himself from an average investor. I think we are already seeing signs of that in terms of the churn in the portfolio taking place or the sectors which seem to be outperforming and these are early days. My sense is that investors are churning their portfolios, reducing their weights for some of the sectors which they believe may not deliver adequate returns. So is this a bear rally? I do not have an answer but within that yes, there can be a lot of volatility and investors should be more looking at their individual stocks rather than trying to figure out where the market direction is heading.

I am getting a divided view on how one should approach financials. Should one remain overweight in financials or is it time to bring the weightage down? How would you advise?

See financials were at the end of the day a leverage play. All banks or NBFCs are basically five to seven times leveraged and they are an indirect play on the various direct businesses. They lend to people, they lend to individuals, they lend to businesses in the hopes that the borrower will be able to repay on time. My sense is that in an uncertain environment where the direction of the economy is not very clear, at least for the medium term where the risk is very high in terms of rising NPAs, it makes sense for investors to be more invested in direct businesses and trying to invest in the leverage business, which is what banks are all about.

Like you rightly said, can an economy grow without the banking system growing? No, it cannot but that does not mean that you as an investor also have to be invested in that sector. So my sense is what has happened of late with banks is that only the top two, three, four banks are in a sweet spot as far as the liability profile is concerned. So they will continue to grow and they will be the drivers of the economy but in terms of the multiple, I think probably the best of multiples are behind them. So you could see earnings growth but there could be some valuation degrowth which could happen in the banking system.

As we have rightly said earlier also, NBFCs’ business segment is also impacted; so banks do not want to lend to them. The bond market also does not seem to be keen to lend to them. So apart from the few NBFCs, the leaders in their segments who have the ability to raise resources, the sector as a whole, otherwise the second tier, tier three NBFCs will struggle. So to answer your question about reducing your weight in your portfolio, yes I think it makes sense to be relatively underweight as far as the banking financial services are concerned. I think it is better to invest in say AMCs or insurance companies or wealth management firms which probably will give better returns over a period of time than the banking system itself than the lenders.

Outside of the purview of financials where else do you find opportunity in this market? Also, have you been a buyer yourself from the March lows to now?

The market has already signalled where it wants to be. If you see the rally which has happened in the pharma stocks or the healthcare sector per se, there clearly seems to be an underweight in that sector and there are some tailwinds also. The investors are rotating money out of that sector, out of the financials into the pharma sector. I think the trick today in this uncertain local and global environment is all about where do you see relative demand certainty. So again, telecom is one sector where the demand is not an issue; so you have seen telecom stocks also doing very well or reasonably well. Pharma as I have said is doing well.

Thirdly, utilities I think seem to be in a sweet spot as far as the demand environment is concerned and at least the revenues were kind of stable. So they also have rallied from the lows. So these are some of the sectors where money is rotating in an uncertain demand environment. Consumer staples are expected to do well but maybe valuations is something which is of concern to many investors. So these are some of the sectors where you are possibly seeing money rotating into.

How consumer discretionary or large consumer discretionary do, we will only come to know over a period of time. Another sector which seems to be in a sweet spot is the specialty chemicals and the agro chemical sector. With the supply chain changes expected over a period of time with China being disfavoured, we are seeing a lot of opportunities in the domestic specialty chemical sector and many of the companies who were there as far as working is concerned; they are doing well and even market is recognising that and they have shown a very sharp bounce up.

What happens to pure play consumption? Do you think FMCG is Covid-proof or do you think they too would be bound to get hit because the supply chain network has gotten damaged regardless?

I think investors will tend to take the quarter one and quarter two underperformance of companies as a one-off. So once you stop something in terms of business and then you resume, it takes two, three, four months for things to become normal. So whatever interactions we have had with corporate who have resumed their businesses in the last 10-15 days, I think it is a gradual process in terms of reaching their fair capacity utilisation. I think that will take time; at least most of the corporate are saying that they assume that it will take at least two to three months for them to be back to normal assuming the lockdown is lifted gradually across the country.

So investors would look at all corporate performance from a perspective that okay, the first three to six months is a one-off. Investors would look at what can be once the economies are back on track in terms of FY22 expectations and then they would be looking to invest in.

As far as domestic consumption staples are concerned, yes, I think it will make a comeback, which is largely finance I mean. There is a huge amount of financing involved in that segment. I think that will be a function of how job losses, MSMEs are performing and the willingness of the NBFCs to be willing to lend. So it is very finance supported to how financiers are able to fund those consumer discretionary expenses, consumer durables, etc. that will be driven more by availability of finance and the risk appetite that investors or rather the consumer would have to take on those extra EMIs.