'Markets conditions are optimal for an investor with a buy & hold approach'

Rising COVID cases and the related developments in Maharashtra have put brakes on the market rally. ANAND SHAH, head of portfolio management services and AIF investments at ICICI Prudential AMC tells Puneet Wadhwa in an interview that the impact on the economy and market of the development is likely to be well contained, unless the magnitude of the second wave is far bigger than the first one. Edited excerpts:

How should investors approach the stock market now? Where do you see investment worthy opportunities?

Market valuation is no longer cheap and the days of easy money are behind us. The current market conditions are optimal for an investor with a buy and hold approach, having an investment horizon of over five years and wants to benefit from secular growth in Indian economy. Investors should continue their systematic investment plans (SIPs), too. Among sectors, the focus is on companies that stand to benefit from the opening up of the economy.

How big a threat are the rising cases and sporadic lockdowns to the stability in the markets?

The instances of rising cases in India is largely concentrated in two – three states. So, even with an event of a lockdown in these specific areas, the economic impact will not be felt in the same manner as was during last year. Further, the economy, government, businesses and individuals are better prepared and are well aware of the risks associated.

In case of equity markets, too, the investing community is unlikely to panic now. So, the impact on the economy and market is likely to be well contained unless the magnitude of the second wave is far bigger than the first wave. Given that it is an evolving situation, it remains to be seen how the second wave pans out. Currently, we do not see rising cases in two-three specific pockets as a major risk to the market.

What's your view on the rising in bond yields?

The rise in bond yields is a reflection of the market expectation of a probable rise in inflation. Investors today are seeing resurgence in the economy, demand and commodity prices, all of which indicates towards higher inflation in the times ahead. At the same time, some believe that in case there is a steep rise in inflation, central banks globally could resort to some tapering of the monetary stimulus, and this might negatively impact the liquidity in the markets to some extent.

From an equity investor’s lens, rise in bond yields is not such a bad news. As long as this trend coincides with economic recovery and inflation, such an occurrence is positive for corporate earnings but negative from a liquidity point of view. In last 12 months, in a market fuelled by liquidity, almost every other stock would rally. Now, since liquidity could be constrained going forward, stock picking becomes very important. It is imperative that investors are aware as to which companies/sectors they are buying.

How should investors position themselves in the financial sector?

The recent Supreme Court decision on moratorium removes the uncertainty surrounding the sector, which is a positive. We continue to look for opportunities within this space, especially names which stand to benefit from infrastructure, manufacturing and industrial recovery, both in terms of ability to lend more and lower non-performing asset (NPA) provisioning. We like banks that offer a combination of corporate and retail as far as lending is concerned.

Could aviation, multiplexes and hospitality sectors be contrarian bets now?

There are opportunities for contrarian investing in commodity producers, corporate banks, select mid corporates and small enterprises. From a medium-term perspective, there are still market segments which have not yet fully recovered from the pandemic aftereffect. For example hospitality, media, airlines. Each of these sectors will have a delayed benefit cycle and currently provides contrarian opportunities from a medium-to-long term perspective. As vaccination drive gathers pace, the economy is likely to head back to pre-pandemic times and these sectors are likely to be back in focus.