Markets, through volatility, may continue to do well: Vaibhav Sanghavi

Though it is a tough ask to take a call on the markets for the next few quarters, VAIBHAV SANGHAVI, co-chief executive officer, Avendus Capital Public Markets Alternate Strategies, tells Puneet Wadhwa he isn’t worried given the sharp rally since March 2020 lows. There is abundant liquidity globally to help buying of assets, he says. Edited excerpts:

There is a clear disconnect between the economic pain and the markets. How long will this disconnect continue?

The Covid-19 pandemic has had a massive negative impact on economies. In the past (2008-09), these liquidity measures have been very effective to stabilise the markets. The huge scale of the current stimulus may continue to find its way to assets, leading to asset price inflation. While the near-term economic data may continue to remain weak, the markets, through volatility, may continue to do well, amid disbelief.

With Unlock 3.0 now announced, what’s your outlook for the markets in the short-to-medium term?

The next few quarters are extremely tough to call. A few variables like vaccine for Covid-19, treatment or development of herd immunity, may help the economy to open up more. While the economic performance and corporate earnings will be challenged, the markets may remain volatile, depending on the shorter-term news flow, including fears of a second wave of the pandemic. Getting to March 2020 lows is highly unlikely despite these fears.

Which sectors and stocks will big investors chase now?

Foreign investors, in our conversations, are viewing India with a positive bias. Extremely low interest rates, a weakening dollar index, and the search for yield and growth will keep India and emerging markets in the spotlight. The constitution of sectors will change once we are through the “fear” of the pandemic, and not the pandemic itself. Once the fear is out, the narrative may quickly change to normalisation and the subsequent growth opportunities, and an economic revival. In that scenario, we believe, that banking and finance, consumer discretionary, and materials and industrials may perform better. Until then, the markets will keep seeking relative certainty in earnings and continue to prefer defensives.

How far has the Covid-19 pandemic pushed earnings growth/recovery?

The market rally in the absence of earnings growth can be shallow without liquidity support. However, the markets can continue to be elevated with higher volatility, with adequate liquidity, which is the current scenario. Thus, while the markets have moved up sharply, it doesn’t worry us much. There is abundant liquidity globally to help assets buying. In the shorter term, looking at the price-to-earnings ratio may not be appropriate on temporary dislocation of earnings. The Covid-19 pandemic has pushed back earnings growth/recovery at least by a year.

Some experts have raised questions on the sustainability of the strength in the rural economy. What’s your view? How should investors look at rural-focused stocks?

The government has been very proactive. It has, of course, been helped by good monsoons as well. Higher spending for MGNREGA, adequate support to the poor in terms of supply of foodgrain and bumper harvests, along with initial lower infections, have all helped. We need to be vigilant on the pace of the increase in infections in rural areas which has the potential to derail the strength. Rural-focused sectors and stocks have outperformed the markets and may continue to do well, should rural areas continue to remain out of potential lockdowns.

What has been your investment strategy since March 2020 lows?

As a risk-averse team, in times of uncertainty or huge volatility, we use higher cash levels as an effective hedge. Our experience tells us that once things stabilize, money put to work later most often has generated good risk-adjusted returns. In terms of sectors, currently, we prefer information technology (IT), pharma, telecom and consumer staples. However, the preference, depending on prevalent valuations, may change after stabilisation. We always keep seeing sporadic preferences for value stocks in our economy. However, for the longer term, I believe value would continue to be value unless it is unlocked. Should there be any strategic unlocking, there can be potentially good performance coming up.

The RBI’s latest financial stability report (FSR) is a stark contrast to what banks have been saying about their financial health. Is it time investors exit financial stocks?

In the near term, there is uncertainty on economic revival. With companies regularly coming to the markets to raise equity capital, the performance of this sector may remain bit subdued. However, on a relative basis, valuations look attractive and the sector will find interest once we are out of this pandemic. With respect to the FSR, I don’t see inconsistencies with what banks are doing as they are strengthening their balance sheets by raising capital for any potential spike in non-performing assets (NPAs).