'Unlikely to see the same quantum of correction witnessed in March 2020'

The key risk to markets would be more domestic in nature due to the second Covid wave, which may impact the pace of economic recovery, Sampath Reddy, CIO, Bajaj Allianz Life Insurance said

The second Covid wave sweeping across the country has made markets nervous. SAMPATH REDDY, chief investment officer at Bajaj Allianz Life Insurance, tells Puneet Wadhwa in an interview that cyclical sectors can be the dark horse in 2021 even though they may be marred with volatility in the short-run. Edited excerpts:

Do you expect the markets to correct significantly from here given the surge in Covid cases and lockdowns imposed across key cities?

The second wave in India is quite large compared to earlier peak seen in September 2020, though the mortality rate has been controlled so far. We could see more partial lockdowns / restrictions in different parts of the country if the case trajectory keeps escalating. This may impact the pace of economic recovery to some extent; although not to the same quantum as seen in April – June 2020 quarter, when a full stringent lockdown was in place. Therefore, we may witness some market volatility in the short term, but are unlikely to see the same quantum of correction witnessed in March 2020. Also, the vaccination drive has been progressing well in India and that may help to flatten the curve in coming months. Investors should use any large market volatility/dips to increase their equity allocation.

How much cash are you sitting on in your portfolio?

We are sitting on low-to-moderate levels of cash across our key equity funds and are looking to deploy further. 

Your sector preferences?

The key sectors that we have been liking for and have overweight exposure to include IT services, fast moving consumer goods (FMCG), healthcare & diagnostics. For the IT sector, new deal acquisition momentum remains strong, with most of the companies winning large IT outsourcing contracts. That apart, strict controls have provided a jump in margins post Covid (some of which is likely to be retained), and the global economic recovery is also helping the sector to do well. Export oriented sectors like IT & healthcare to also benefit from the recent rupee depreciation.

Has the rally in FMCG run its course? 

FMCG sector continues to deliver steady growth and is less affected by volatility in economic activity. We are also positive on well-capitalised private banks; and even though they may witness some short-term volatility if pace of economic recovery moderates, their long-term fundamentals remain intact. Large private banks have seen lower than expected non-performing assets (NPAs) and credit costs during the first wave of Covid and are better prepared to handle any risks to the economic recovery.

Can the current market conditions bring more retail investors to the markets like they did in 2020?

With the second Covid wave in India, the mood seems to have turned a bit cautious. Domestic mutual funds registered a record net equity outflow in fiscal 2020-21 (FY21), as investors probably chose to partially book profits amidst the sharp market rally. In March 2021, however, we saw a reversal of flows in equity funds that registered the first monthly net inflow since June 2020, and the highest monthly net inflow since the month of March 2020. SIPs also registered a record high monthly inflow of around Rs 92 billion in March 2021, as compared to Rs 75 billion in the previous month. In the event of correction / market volatility we could again see lump sum equity flows pick-up the way they had in March 2020.

Retail investor participation in overall stock market cash volumes (in percentage terms) has moderated a bit from levels seen in June-August 2020. But if market buoyancy returns and on account of the lockdown, we may again witness rise in retail investor activity in markets, like last year.

Are the risks to the markets more from domestic developments rather than global cues?

Presently, the key risk to markets would be more domestic in nature due to the large second Covid wave, which may impact the pace of economic recovery in the near term, if more lockdowns or restrictions are brought in by more states. That said, global cues cannot be completely ignored, especially the stance of major global central banks. Any indication of change in policy stance (if economic recovery remains optimal) can lead to volatility in global markets, including India. One also needs to monitor global inflationary expectations and bond yields.

How should investors approach financial sector stocks?

With the onset of the second Covid wave, there have been renewed concerns on bank’s asset quality and growth. The sector has been underperforming lately. However, we note that the actual asset quality impact from the first wave is turning out to be far less blunted, thanks to the steps taken by the Government and the Reserve Bank of India (RBI). We prefer large private banks, which are very well capitalised and have a robust low-cost liability franchise. They are currently trading closer to their historical price-to-book (P/B) valuation multiple, which we believe is reasonable.

One sector/theme that can emerge as a dark horse this year?

Domestic cyclicals have seen a sharp rally over the past year after the correction seen in March 2020. Some of the cyclical sector’s long-term performance has caught up with defensive and quality sectors, after underperformance in earlier years (eg. Metal index is now outperforming FMCG index over a 5 year period). Even though cyclicals may see some volatility in the short-term due to the second Covid wave, but with the rapid expansion in vaccination drive in India, the focus on domestic growth will come back again – helping cyclicals come back in limelight.