'Enthusiasm over recent IPOs reflects excess liquidity, improved sentiment'

Investors should focus on the company prospects, its fundamentals and valuations and not be concerned with primary or secondary issue, says Poonam Tandon of IndiaFirst Life

As the results season for the second quarter of the fiscal 2020-21 (FY21) gets underway this week, POONAM TANDON, chief investment officer (CIO) at IndiaFirst Life tells Chirinjibi Thapa that for the market rally to be sustain, earnings will have to be justified eventually, which might take a few quarters. Edited excerpts:

Do you consider the rally in global equities from March lows healthy?

The crash in March was clearly a knee-jerk reaction to the risk of unknowns thrown by the Covid-19 pandemic. Generally, such panic reactions result in excessive corrections and, as clarity emerges, the markets do bounce back. The second aspect is about the excess liquidity globally due to stimulus measures announced by major economies. The excess liquidity favoured equity as an asset class for investing, considering the extremely low interest rates across major economies. We agree that for the rally to be sustainable, earnings will have to be justified eventually, which might take a few quarters.

Should investors enter the markets now given the sharp rally since March 2020 low?

Equity markets generally have the tendency to factor in the future prospects. We are now learning to adapt to the pandemic and regain normalcy. Although FY21 is likely to end lower in terms of GDP and earnings, hopes of recovery and growth are much better for FY22 and onwards. In that light, although intermittent volatility and corrections from current levels cannot be ruled out, the investors looking from a long-term horizon of 3-5 years should continue deploying money into the market in phases. We recommend being selective and taking advantage of any market weakness to accumulate quality companies.

What pockets/sectors should investors look at for good stocks that are still reasonably valued?

During the previous six months, the markets have witnessed sectoral shifts in terms of preferences with few sectors such as IT, Pharma witnessing significant rallies while others such as BFSI, Capital Goods undergoing steep corrections. Although the sectors which have rallied still hold promise for the future, their upside may be relatively lower in the near-to-medium term. Hence, it would also be prudent for investors to look at quality companies within underperforming sectors (such as BFSI, Capital Goods , Metals, Auto & Auto Ancillaries ) to invest with a 3 to 5-year horizon.

What has been your investment strategy in the last six months?

The equity market correction in March and April 2020 offered a great opportunity to accumulate several well-run businesses at attractive valuations. Our approach has been to invest in sectors and companies where long-term growth outlook is intact despite the near-term challenges, and valuations look reasonable. We have been looking at businesses which are able to adapt to changing circumstances, can generate good cash flows, and recover rapidly when the current situation stabilises

Does the upcoming festive season hold any promise for consumer durables and autos?

The Auto sector (2 wheelers, 4 wheelers and tractors) has been witnessing an improving traction from the lows and is expected to return to pre-Covid levels soon. Moreover, the pent-up demand may increase during the upcoming festive season. However, the revival in the commercial vehicles segment (MHCV & LCV) will depend on the recovery of the economy. On the Consumer Durable front, the pent-up demand may catch on during the festive season 

Is the bullishness on some of the recent IPOs justified? Should retail investors bet on the forthcoming IPOs?

The enthusiasm with recent IPOs clearly reflects excess liquidity and improved investor sentiment. We think investors should focus on the company prospects, its fundamentals and valuations and not be concerned with primary or secondary issue. Retail investors should consider all these aspects meticulously before applying for the IPOs and avoid investing blindly.

What are your expectations from the Q2 corporate results? Which sectors do you think may surprise positively?

On an overall basis, we expect Q2 earnings to be encouraging, given the better-than-expected recovery. BFSI space would be keenly watched for the impact of moratorium on its financials. Sectors like FMCG, Autos, and Consumer durables would give signals of demand. Sectors like IT, Pharma, Agriculture are expected to be positive.