We are sitting on some cash to take advantage of volatility: J Jaipuria

The government stimulus and a surprise rate cut by the Reserve Bank of India (RBI) have kept the markets busy over the last fortnight. Jyotivardhan Jaipuria, founder and managing director, Valentis Advisors, tells Puneet Wadhwa investors should follow a barbell approach to get a mix of sectors that are relatively immune in the near term, and those that are cheap but could deliver higher returns over the next few years. Edited excerpts:

What is your outlook for the markets?

We are currently seeing a triple shock – medical shock and consequent supply shock and demand shock. Finding a medical solution to Covid-19 is going to determine the shape of the markets. Over the next 24 months, we are assuming there would be a solution to the medical problem through medicines or a vaccine, most probably both. While the financial year 2020-21 (FY21) would be a tough year for the economy, FY22 should see normalisation, providing the stage to the markets to revert to their earlier levels. In the near term, there remains a lot of uncertainty surrounding the virus and the lockdown. We have, therefore, been keeping some cash in the portfolio to take advantage of any market volatility.

What’s your view on the measures announced by policymakers to fight the economic fallout of the pandemic?

The focus on helping the economy has fallen on the monetary policy rather than the fiscal side, probably given the already deteriorating government finances. The RBI, doing the heavy lifting, has focussed on providing liquidity into the system, cutting interest rates and easing borrower stress. The challenge before the RBI is how to reduce the risk aversion of banks.

The government has chosen to provide its support mostly through guarantees to micro, small and medium enterprises (MSME) and cash transfers to the weaker sections of the society. The market has been disappointed by the lack of fiscal support, which may be required to stimulate demand. Hope still remains that the government will step up their spending once the economy opens up. Lastly, the government has brought a transformational move in the agricultural sector by dismantling the APMC. They should use the crisis to further ease business through legislation like land and labour reforms.

 

There are expectations of another round of stimulus by the US Federal Reserve (US Fed) as well. Will the other central banks follow?

Central banks across the world will do everything to help kick-start the economy in the background of the Covid-19 pandemic. Liquidity will be easy in the world and interest rates low. Negative rates are likely. Bond yields will be low in the foreseeable future. The liquidity infusion has helped and will continue to aid equity prices.

How weak has the pandemic left the Indian financial sector?

We were just coming out of a period where we had provided for past non-performing loans (NPLs) and the future was looking more robust for the financial sector. Covid-19 will definitely lead to another round of NPL provisioning since companies don’t really plan for scenarios of zero sales. Overall, this will lead to consolidation in the sector. Within the lending space, we will be more bullish on the large bank space. The insurance sector as a theme has a long way to go given under-penetration and it would come out stronger.

What's your view on how things are shaping up for the telecom sector?

The telecom industry is in a sweet spot because of three factors. First, “data is becoming the new oil”. The secular growing demand for data has been accentuated by the lockdown and will continue as work from home (WFH), and reduced travel and physical meetings will drive demand for more data. Second, the industry has been consolidated into three players now and tariffs are likely to head up. Third, raising equity from external sources appears possible at favourable terms. There is still the issue of the payment of AGR dues; the government may provide easier terms of payment to telcos.

 

What’s your advice to investors now?

Investors should follow a barbell approach while investing to get a mix of sectors that are relatively immune in the near-term, and those that are cheap but can deliver high returns over the next few years despite the near-term stress. On one side, you will have sectors like fast-moving consumer goods (FMCG), pharma, and software that have been relatively immune from the lockdown turmoil. Here, our preference is for pharma and telecom stocks. On the other side of the barbell, consumer discretionary (we like tractors and two-wheelers), and gainers from the rising rural income and infrastructure spending by the government, like cement, can deliver higher-than-normal returns over the next few years.

Your estimates for corporate earnings for FY21 and beyond?

Earnings in Q1FY21 will be massively negative with many companies reporting a loss. They will gradually recover as factories start to hum again. Overall Nifty EPS for FY22 will be in the Rs 600-650 range with a fair bit of volatility in the next few quarters.