Buying quality at dips in a staggered manner should be a beneficial portfolio construction strategy in the current time, said Cheruvu.
Rajesh Cheruvu, CIO, Validus Wealth, believes equity is the only asset class that can consistently earn inflation-beating returns, but it must be held over considerably long period of time. So, dumping the portfolio at a loss when markets fall and waiting for an opportune time to re-enter is foolish, he said in an interview to Moneycontrol’s Sunil Shankar Matkar.
Yes, the market has been consolidating in a tight range after peaking out in mid-February. The ferocious second wave has somewhat sapped out the euphoria built in by a transparent, credible and growth-focused Budget.
The unforeseen return of localised lockdowns to tame the virus and uncertainty around the government’s ability to ensure immunity of critical mass in a reasonable time has raised concerns over near-term growth as well. This has led to elevated volatility (as seen in VIX index) and FII outflows after almost a year of strong inflows.
But what we have learnt from the past is that markets are always forward looking and tend to move on from temporary disruptions (which are not structural and don’t last beyond 1 quarter or two), rather quickly.
And history has also taught us that ‘timing the market’ is futile but ‘time in the market’ is always rewarding. Equity is the only asset class that can consistently earn inflation-beating returns, but it must be held over considerably long period of time. So, dumping the portfolio at a loss when markets fall and waiting for an opportune time to re-enter is foolish.
In the current environment, valuations are a bit stretched, in fact, priced to perfection, so any event which slightly impacts future earnings delivery, triggers a correction. Buying quality at the dips in a staggered manner should be a beneficial portfolio construction strategy at such times. Once COVID situation is brought under control, GDP growth scenarios for India are very bright which would have a solid rub-off on many sectors and market leading companies within those sectors.
Q: Any COVID-proof sectors that one should consider for investment right now?
We believe top quality sector-leading companies are inherently COVID-proof but if someone wants to invest in specific COVID-proof or beneficiary sectors, then it would be prudent to follow a core-satellite approach.
The core (70-75 percent) would constitute allocations to above mentioned businesses and satellite (25-30 percent) would focus on short-term thematic ideas with a 6-12-month view like pharma (API, CRAMS, Vaccine, Diagnostics), IT services (Cloud, Digital), new tech (EV, Platform plays), PLI (Aatmanirbhar Bharat) and infra (Capex loaded Budget).
But investors should be cognizant of the fact that the non-core allocations are not buy-and-hold and must be exited immediately after expected thesis has played out and absolute returns have been made.
Q: What is your take on the March quarter earnings, so far?
Around 100 odd companies from NSE500 have reported numbers for the Q4 and FY21 so far. Though, on an aggregate basis, sales growth has surprised positively by around 9 percent versus consensus estimates, there has been a significant around 28 percent miss when it comes to EPS (Net Profit). Also, while 60 percent of the companies reporting results have posted surprise (beaten estimates) on Sales front, only 40 percent have managed to do so when it comes to EPS.
While materials, financials and communication services have contributed to sales surprise, IT, healthcare and consumer discretionary have been the laggards.
On the EPS front, healthcare, industrials and energy have surprised whereas financials, energy and IT have missed estimates by wide margins. Higher raw material prices have started to impact profit margins for a few companies as demand recovery was nipped in the bud and the output price escalations could not offset input price inflation. But these are still early days, and we have a long earnings season ahead with many companies yet to report which could change the picture as we progress.
FY22 EPS growth forecasts are getting downgraded and face downside risks which depend upon the interplay of the virus and vaccinations.
Q: All ratings agencies and experts lowered the economic growth target for FY22, citing the fast-rising COVID-19 infections. What are your expectations about growth, and have you lowered the FY22 target?
Q1FY22 (April-June 2021) quarter had the benefit of low base (national lockdown in April-May 2020) and was expected to report a strong around 25 percent YoY growth leading to a real GDP growth of 10-11 percent for FY22.
The resurgence in cases led to night/weekend curfews and localised lockdowns across all states in April which mostly have been continued in May as well. High frequency macro-economic indicators like auto sales (both wholesale and retail), fuel demand (petrol, diesel, ATF), rail freight and property registrations have fallen sequentially versus March (MoM).
Even mobility indicators which had shown good recovery to close to pre-COVID levels till February have again weakened to 35-50 percent below normal levels by end of April. Overall unemployment rate also inched up to 8 percent in April versus 6.5 percent in March with urban unemployment worsening to around 10 percent.
Due to this, Q1 is now going to bear most of the brunt of the second wave mishap, thus exposing full-year GDP forecasts to downward revisions, unless Phase-3 of vaccination program is executed quickly helping the coming quarters to offset this impact.
Q: What is your take on the banking and financials segment after the RBI announced several liquidity measures to support the economy?
RBI continues to be both innovative and proactive in its approach to address debt market volatility and safeguard financial stability. At an unscheduled press briefing on 05-May-21, the RBI proposed an on-tap liquidity facility of Rs 50,000 crore to emergency health services, SLTRO of Rs 10,000 crore for small finance banks, and reopened restructuring window for individual and MSMEs. This indicates RBI is ahead of the curve this time around.
The liquidity measures are also very focused on segments of the economy that have undergone the largest pain in the ongoing as well as the past wave in terms of slippages and restructuring – Retail and MSME segment. So, they do take care to alleviate the transient pain and smoothen the impact of the 2nd wave on the lending institutions. Our current thesis on the banking space is that large private banks and NBFCs with excellent underwriting and asset quality, adequate capital buffers, granularised liabilities and tech enabled platforms stand to win disproportionately at the expense of smaller banks and NBFCs be it PSU, co-operative, regional rural banks, and the like.
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