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    It’s an evolving market, keep some powder dry: Vetri Subramaniam

    Synopsis

    Low interest rates only an enabling factor, may not make mkt fly, says UTI AMC's Head of Research.

    Buying businesses for 10-20 years; next 2-3 quarters not key focus: Vetri Subramaniam
    Are we in a prolonged bear market for equities, or do you think we are nearing the end of the tunnel?
    There are two ways to really crunch this. One is, where are we in terms of valuations? The answer to that when we look at multiple indicators is that it has clearly dropped into attractive territory. But if I were to look at some of the lows that we have seen for the valuations seen in 2008 or 2003, then it is not very clear to me if we have gone close to that yet. As an equity investor, I would say the market is clearly attractive from a long-term point of view, but it is still an evolving situation. So you need to keep some of your powder dry. That is the way I would approach it.

    When you say markets are looking attractive, this is based on historical parameters where interest rates were playing a role, where situations were very different. Right now, we are staring at a world, at the unprecedented times that we are in where central banks are printing money and interest rates are coming down. Do you think it would be a wise idea to look at historical benchmarking in judging what is coming next?
    I would pretty much do that. Because I think the best measure we have over time is the valuation cycle; it picks up depending on how people get excessively optimistic or pessimistic at different points of time. When these measures start to get into that green territory, one has to react to that. You can choose whether you want to be all in or partly in, and the market has not gone to all-time low valuations yet.

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    As far as interest rates are concerned, they are in a slightly more tricky territory. Japan has had record low interest rates for a long time, it has not done anything for the stock market. Most people, of course, point to the US example, where low interest rates did tremendously well for the stock market. But it is only an enabling factor, it is not a factor which makes that outcome a certainty. So that is something you need to keep in mind when you anchor things to interest rates.

    From India’s point of view, what really becomes interesting is that our macro situation other than Covid-19 is actually quite stable. The only parameter which we will have to worry about in the next one quarter or two will be growth. I think there is enough ammunition both in monetary policy and fiscal policy to support the economy through this difficult time.

    Can I safely say all eyes are now on the government action for a relief bailout for companies, because they have done whatever they could do to bail out and help the poorest of the poor? RBI, some would say, has fired a bazooka, I would say it has used heavy artillery. So do you think the logical extension is that a large relief package should come for industries and for affected sectors?
    Absolutely. You have hit the nail on the head. As far as fiscal policy is concerned, the first response from the government as it should be was essentially to address the humanitarian crisis. There may be a need to do more on that front. But at some point, you will have to start thinking about what happens after we get through this successfully, let us say over two months, three months, four months. What comes next? Economic activity would have come down; there would be a stress in the system and it will be incumbent upon the government to use fiscal policy at that point as a tool to get business activity to pick up and the government might have to make direct interventions. You may have to also frame sector-level policies, but this is a very classical Keynesian situation, where when households and corporates are both going into risk averse mode, the fisc needs to step up.

    Typically, we have always worried about the Government of India’s fiscal deficit being very large, but today we are in an environment where most probably the claim of savings coming from households and corporates is going to be very weak. So this is the time for the government to step forward and think about how it can use its spending power and sector-level policies to get economic activity to pick up once we get out of this short-term rut.

    On the same subject, if you have to hand out your wish list or list of recommendations to the government at this juncture, what are the top three points that you think the government must execute right away to try and lift up India Inc?
    It is still an evolving target and in that sense, the government’s response -- and as we have been hearing from Delhi -- has been one more of taking gradual and incremental steps rather than trying to fire everything with the fiscal policy at one go. That is the right way, and therefore, I do not really want to rush out there and put forth my wish list.

    I think the essential point to keep in mind is that the economy will need support; you need to be able to revise those sector-level policies. I am sure industry captains, CII, Ficci, all of them will be able to collate that and put it together. I think the main recommendation I would make to the government is that this is no longer a time to focus excessively on fiscal deficit. It is important to focus on fiscal deficit when there is demand for money and investment from other constituents of the economy. Today there is no demand, so this is not the time to be shy of using the fiscal deficit as a tool to get out of this slowdown that we are likely to experience. That would be my primary recommendation.

    As far as the other stuff is concerned, the industry bodies will do a better job of collating what support it needs. Areas like travel, hospitality etc might need a completely separate sector-level package. That is for the industry bodies to come up with.

    On the subject of market recovery, you were saying we have not really hit all-time low valuations if you were to historically draw a comparison? But when the recovery does kick in, do you think it would be very largecap-specific or would you see a more broadbased recovery, because just about everything has fallen down in this fall?
    If you go back and look at history, that suggests largecaps have always first led the recovery from these kind of crisis lows. It is only after that the rest of the market starts to broadbase and participate. So that is certainly something, which is there.

    But when you are looking at companies, it is also essential to look at more than just largecap-midcap breakup. You want to see which are the companies that are likely to come through this challenging period relatively unscathed. Because potentially they will be the companies which would be best placed to capitalise on growth as and when things start to normalise. What I essentially point to is the fact that one needs to keep in mind that there could be supply-side damage in some sectors, and when that damage happens, the survivors in those industries actually come out much stronger. So I would be a little bit more judicious in choosing stocks rather than focussing excessively on sectors or even on largecap versus midcap.

    How does one assess the entire space where NPAs could be a genuine problem whether it is tourism sector or perhaps some SME pockets or perhaps hospitality sector or food industry or restaurants? The government may have given them a three-month moratorium. But in the next three months nothing is going to change for them, which means after three months NPAs will start kicking in. If that is the situation, what happens to banks? Are we staring at a painful re-emergence of an NPA cycle for the next couple of quarters?
    That is a very valid point and that goes back to what I said earlier. What the government seems to be doing is more in terms of what is essential for the next three months. And then we can continue to build on that. As we emerge from this situation hopefully over the next few months, there will be further course corrections that government might have to make, either in terms of widening the debt framework, reducing the period in these sector-specific interventions. So at this point, one needs to presume that policy makers in Delhi and at Mint Street will continue to intervene as and when required, as we saw them doing last week. Yes, certainly financial institutions, banks and leveraged businesses will tend to be a lot more volatile over the next few months, simply because as leveraged businesses face these challenges, you will see them face a lot more stress. But I do think eventually policy makers will intervene and address many of these.

    So whenever the markets will settle down, what should the one focus? Which are great value stocks to watch, strong dividend yield, low on price to book and low on PE. or should one stick to stocks or companies where the disruption is temporary and growth is permanent something like let us say consumer names, FMCG names? We may be all working from homes, but we are still consuming essentials and necessities. We may not be consuming luxuries, but we are still consuming necessities.
    That is a very limiting framework. Because we are not just looking at who will do better in the next two to three quarters relative to other businesses. We are essentially buying businesses for 10 years and 20 years. If you know one or two quarters for those companies are difficult, when you look at the overall valuation paradigm yes it will be painful and challenging. But that does not really change the long-term argument. I would not focus so much on these aspects. Honestly, it has always been my investment approach to have a balance of companies where valuations are attractive, but you also equally want to have exposure to companies which have long-term growth run base. So I prefer a lot more of a balanced approach.

    To my mind, the key is which are those companies that can emerge from this challenging time and grow faster. Secondly, which are the industries that are likely to see significant supplyside disruptions. I do not mind going into the companies that are likely to gain market share coming out of this challenging period. There are opportunities on both sides. This is a market where many names are looking attractive after this correction, and you do not really have to be choosy. Pick your spot and stick with it. To my mind, that is far more important than put your feet in the water and start buying something. I do not think you need to fixated so much about where it should be A kind of companies or B kind of companies.

    What are we staring at in terms of earnings? I know it is still early days. Most of the corporates we have been speaking with really do not have any visibility. But have you got a peg back for two quarters, three quarters when it comes to an earnings revival? What is the worst case scenario that you think the market is building in or pricing in right now?
    Honestly, in times like this the best thing to do is look at the trailing earnings and trailing multiple rather than focus on FY21. My sense is that FY21 is now pretty much going to be a washout. It will be a negative year for earnings growth, so do not get fixated too much on what FY21 will be. But you know if you get a big negative year in FY21, because of whatever is happening now, then you will also get a recovery going into FY22. So this is not the time to fix it on what that exact EPS integer will be.

    The trailing earnings are telling you that we have dropped into reasonably attractive valuations. When you think about companies which have already demonstrated their ability to compound earnings at 12% or 15% or even 10% and 25% in last 10 years, what you need to do is evaluate their trailing valuations today to what could be the outcome in next 10 years. That earnings growth looks pretty much like what they did in the previous 10 years. That is our role as stock pickers, that is our investment process, and that is what we are guided by. We are not so focussed on what will happen to that FY21 earnings, yes if the next 10 years look dramatically different compared with the previous 10 years because -- let us say -- this virus were to shut the world economy down and dramatically damage it for the next one, two, three, four, five years, that is not baked into the process that we are looking at. The simple thing we are looking at is, which stocks look sensibly valued, if their next 10 years’ outcome looks reasonably similar to what they have delivered in the previous 10 years, then those are the stocks we will be attracted to.




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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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