Which stocks should you look at now? Ashwini Agarwal explains

How are you keeping yourself calm in this kind of a time? Long term investors are insisting to not panic and that it is time to stay put but are long term investors missing the fact that the shape of the economy is going to change permanently? As of now, it is very difficult to talk about the long term when everybody is struggling to survive in the short term?
The point that most commentators are making, which I will also highlight, is that what comes to rescue at this point in time is asset allocation. If you had an asset allocation which is appropriate to your age, to your income and to your savings profile, then sticking with the long term is the right answer to my mind because in the long run, these kinds of events do come once in a decade but they always pass.

So yes, it appears very scary right now but all of us have seen 2008 and we have seen 2001 just after 9/11. We have seen the tech bubble and so on. I started my career when the Harshad Mehta meltdown was in full swing. So when things are down it just appears very bleak. And no two events are the same but what is same is that eventually things do come back so long as you have the financial ability to ride out the storm, which means no leverage and an appropriate asset allocation.

There are a variety of factors why banks are down. I am talking about private banks. One thought is that banks ultimately are a leverage play and the leverage in the system will reduce both at the corporate level and also at the retail level. In fact, there is a very valid concern that there would be retail delinquency and the problem will start emerging only after three to four months. So in this kind of a backdrop where we know that credit will get squeezed and leverage will get reduced, what is the right way to look at private banks?
It is a very interesting question because what you say is absolutely right. There are fears of leverage at the retail level and at the MSME level and how some of that leverage is likely to turn bad. We really do not know how bad it will get because it will depend upon whether the lockdown gets lifted in entirety or in stages on 15 April, how the virus data looks and how quickly businesses come back. You could paint an optimistic scenario and say that look, if the lockdown is lifted in most parts of India and by the end of April, labour comes back into factories, then MSMEs will face some stress but by and large they should be able to muddle through.

You will see a small spike in NPL ratios maybe in the September quarter or the December quarter because in any case, in the June quarter you will be covered by the dispensation that the Reserve Bank has given you. But over a period of time, we should be able to work it out. But if this lockdown continues for a lot longer and if the infection rate is much higher, then we do not know how to bet on banks, which will be the worst hit from the second order and the third order effects of an economy going into a tailspin.

I also have to add that I am hoping that the government will come out with more fiscal measures to boost demand, to provide relief to the worst affected; those in business as well as those in private employment or self employed. What we have seen till now as of last week is a relief only for the poorest of the poor, which obviously comes first but at some point in time, I would expect the government to come out with more fiscal measures, especially if the scenario turns out to be worse than the most optimistic case.

So we will have to see how these things come out, what the government offers and how the banks take it. If the bank is reasonably well capitalised, if it has a history of selecting its asset quality well, then maybe they will have the ability to bear the pain and come out of the other end stronger with a better market share and at some point in time, these stocks will be worth buying. Maybe if the situation is not as bad as we can imagine right now, maybe they are already good buys. It is very difficult to tell right now.

How does one assess whether it is the time to buy or not because ultimately you have to work with an assumption and frankly since all assumptions are off, price cannot decide the rationale. At what price you would come and say that look, whatever the worst case scenario is, markets are pricing it in and I am going to buy irrespective of what technically people are telling me and what my fellow fund managers are doing?
I do not think there is a straightforward answer to this question because we do not know how bad the propagation of the virus will get. We are sitting on a day when we have had a 25% spike in the infection rate over the last 24 hours, which came on the back of another 25-30% spike. So these rates are alarming. Now obviously some of this has had to do with one particular gathering in Delhi but one does not know how deeply and how far and wide it will spread or whether these elevated rates will continue. So we will have to watch the data to decide.

So I do not think the price can be the determinant at this point in time. The way I am thinking about the market at this point in time is that one has to look at three factors if you want to deploy some cash that is available with you; one is look at companies that are largely dependent upon the Indian economy. The reason I say that is, it is harder to judge what is happening in Europe or the US and therefore export-oriented businesses are harder to forecast at this point in time in my opinion as compared to what we can see and feel in the domestic economy.

Second, look at companies that have no leverage or very little leverage so they have the ability to ride out the storm even if the storm lasts for three months or six months. And the last but not the least, focus on essentials; companies that cater to essential products or services and where demand may not be there today but it will come back; whether it is medical services, hospitals, pharmaceuticals, consumer products where some stocks have not fallen but others have or whether it is any of these essential services where demand will eventually come back without fail and these will be the first things that the consumers will start consuming as things normalise. So nondiscretionary and essentials is what I would focus with strong balance sheets and an India focus.

Consumer stocks before the crisis were trading at lofty PE multiples. Logicically, day to day functioning essentials are still required and consumer demand may shift from one brand to another but we are still consuming basic daily essential products, hygiene products or basic consumer perishable things. So do you think the PE multiple for consumer names like a Godrej or a Britannia or an HUL or a Nestle will only expand?
I do not think so. I think that at least from my perspective and I am wearing my hat of value investing, I would dig deeper. I am unfortunately not at the liberty to take names but there are names within the areas of consumption that you spoke about where you do have companies that have fallen hard as a result of this crisis. Some of them smaller companies and midsize companies are going through their own unique situations where the prices have come off and valuations appear very reasonable to me. Those are the names I would focus on and not necessarily the expensive companies with loft multiples that you point out; so you can play the same demand via different ways and means.

Let us take life insurance for example. That is another area which is essential where some stocks have taken a solid beating. The business is not any worse today than it was a month ago; so those are the kind of things that I would focus on.

How are you looking at the pharma space because this COVID outbreak could be a big opportunity for the Indian pharma sector?
Pharma is right up there. That was the first sector I had mentioned and we were quite positive on pharma even before this COVID-19 event started to play itself out because these are stocks that have massively underperformed over the last three years. In several cases the franchise value of the domestic business is more than pain for the current market price with very large export businesses being valued at zero or arguably negative value.

So I continue to be reasonably positive about pharma. The only risk that we deal with in pharma at this point in time is really a regulatory event because these are unpredictable things and can hit any company at any point in time; so the way about pharma companies and pharma investing is to hold a bouquet of stocks so that an unanticipated regulatory event does not compromise your portfolio returns.

Would you go short in this market? It is a 30-40% fall in individual stocks which optically prevents you from going short but if we do not know what the uncertainty is going to be and whether it is a year or two years. For some specific pockets like tourism, hospitality and travel, what stops anybody from going short in this market because if the market has not discovered its value and there is a lot of uncertainty then maybe money can be made by still going short?
You ask me a question which is beyond my capability set. I have never shorted professionally. We run a long only portfolio and I have never sort of seen the short side of a trade; so frankly I am not qualified to comment on this. I do not know whether shorting make sense at this point in time when stocks have already fallen so much; what if the lockdown lifts on the 15th of April and barring this spike that we have seen over the last two days related significantly to one large gathering in Delhi; from what I understand, this kind of peters down and it becomes a manageable situation. Bulk of the lockdown is over and by the end of April we find most factories are running at 60-70%, your shorts will burn you in that environment.

So the real answer is, go back to the basics that focus on asset allocation; if you have a lot of cash, put a little bit to work. If you have a well designed asset allocation programme you should already be under invested in equities; so it is time to take some money off the table from other asset classes and put it into equities. Obviously not everything at one go but a small slice because that is what an asset allocation will force you to do within your equity portfolio. Look at essentials, look at companies with good balance sheets, look at India oriented businesses is what I would think.