Markets have factored in the worst-ever quarterly numbers: Sunil Singhania

After a sharp recovery from their March 2020 lows, the markets are now preparing for India Inc to unveil its financial performance for the June quarter. Sunil Singhania, founder, Abakkus Asset Manager, tells Puneet Wadhwa long-term investors should take a forward-looking call now rather than wait to buy at March lows. Edited excerpts:
 

Do you think investors have missed the bus or will the market give another March 2020-like investing opportunity over the next few months?

Global equities have had a good liquidity-driven run, with several markets recording their best quarterly gains in years. Several stocks have even doubled from their lows and there is now a feeling (among several investors) of having missed the opportunity. Though the markets can always have 5-7 per cent correction, it does look highly unlikely that we will see the March 2020 levels in a hurry. However, for long-term investors, there will be always opportunities and they should take a forward-looking call, rather than wait to buy at March lows.

It has been a liquidity-driven rally without adequate support from earnings growth in a weak economy. How much does this worry you as a fund manager?

There is no doubt that there is huge liquidity globally. With interest rates at all-time lows across countries and panic due to Covid-19 receding a bit, there is optimism on the economic front, as well as equities. Again, the June 2020 quarter is going to be a washout for many sectors and companies; it looks like it will be almost September 2020 by when normalcy shall return. However, for investors who are fine with wishing away this short-term aberration and focusing on growth post normalcy, there is scope for hope and optimism. While the financial year 2020-21 (FY21) will surely see contraction in India’s gross domestic product (GDP), it is possible that if Covid-19 does get controlled, growth rates for FY22 can be in double digits.

Do you expect global central banks to turn off the liquidity tap as economies limp back to normal?

Global central banks have used the balance-sheet expansion mode to tide over the near-term economic stress because of the Covid-19 pandemic. Logically, they will turn off this tap at some point. However, that appears to be some time away and gradual, as was the case after the Lehman event. With the dollar now at the margin, weakening a bit and with interest rates almost zero, I am very optimistic about huge foreign direct investment (FDI) / foreign institutional investor (FII) flows coming into countries like India. Domestic investors have always used big corrections to invest more. We expect the trend to continue.

Are the markets underestimating the pain in the economy?

We are heading into a challenging two quarters of the economy and financial results season. The markets have discounted a lot of it and are looking beyond the current year. Unless there is a big second wave of Covid-19, which cannot be ruled out, the economy should come back on track in the second half of FY21. Some market segments are overheated and my advice to investors is to refrain from chasing momentum.

Has India Inc started seeing green shoots of recovery?

Feedback from India Inc is mixed. The rural-focussed sectors and companies are doing well. These include agrochemicals, seeds, fertilisers, tractors, two-wheelers, value staples, and consumer products. Some discretionary spend sectors like multiplexes, luxury consumer, cars, retail, and travel are more affected and their recovery will be long-ended. By and large, for most sectors, it is expected that demand should be 90-100 per cent of last year’s levels by September 2020. Indications from goods and services tax (GST) e-way bill numbers/collections, toll collections, power consumption, cement sales, etc, also point to the fact that the recovery is visible month after month.

Your estimates for corporate earnings growth?

Corporate earnings for April-June 2020 is anyone’s guess, as the maximum impact of the Covid-19-induced lockdown will be visible in this quarter. The good thing is the markets have already factored in the worst-ever quarterly numbers. More than the numbers, the guidance for the way forward by corporates, as well as the trend in Covid-19 numbers, will be more of a market mover. We continue to remain concerned about discretionary spend sectors and also expensive stocks of companies that have slow growth that does not justify peak valuations.

Which are your overweight and underweight sectors?

Incrementally, we are positive on the financials with good parentage, telecom, information technology (IT), agrochemicals, export facing pharma, and semi-urban/rural-facing consumer sectors. Banks with great deposit franchises are also our preferred investment sector. We follow a focussed fundamental-driven approach with a 15 per cent return on equity (ROE), 15 per cent growth and less than 15 PE as key parameters. This has helped us stay disciplined and resulted in the fund beating the benchmark by almost 25 per cent over last year.