While the gradual opening up of the economy is good news, the pace of recovery will depend on the level of consumer confidence and demand, Taher Badshah CIO, Equities, Invesco Mutual Fund tells ET Wealth.
Is the economic stimulus package lacking firepower or does it have enough bite?
The fiscal stimulus reflects the fine balance the government has to achieve between the need to do a bare minimum for the most distressed parts of the economy as a consequence of the lockdown and its ability to do so. The stimulus makes an honest attempt to provide some solace to SME/MSMEs, NBFCs, farmers, migrants and states.
Given that the bulk of the initiatives are in the form of credit guarantees, the impact and utility of many of the elements will only be known with time. While in the first instance it will help spur credit demand within the intended sectors, it is the subsequent outcomes on credit behaviour and credit quality that will determine the success of the initiatives. Tying up some loose ends along with some clarity around implementation and execution details can make the overall program reasonably effective. What’s interesting is that the government has also chosen to expedite a few structural reforms, some of which like opening up the market for agricultural produce, commercial mining, hike in FDI for defence to 74% and further push to privatization could have important positive long-term ramifications.
Is the market past its fear phase? Or are we likely to see another sharp sell-off?
I would think markets are past their point of peak fear. There is a very low probability of equity markets globally as well as in India re-testing the lows seen during March 2020 due to the following reasons: There is evidence of control over the pandemic across many parts of the world due to lockdown and social distancing initiatives over the last 3-5 months.
Strong fiscal and monetary stabilisation measures have been initiated by various governments across the world. Varied efforts at treatment and cure of the virus at multiple medical institutions around the world are in progress. Economies globally are attempting to emerge from a lockdown. It would take significantly bad news for markets to revisit recent panic bottoms.
Is the recovery likely to be much longer drawn out than what market indicates? How is the ‘new normal’ likely to shape up?
While from a supply-side perspective, the gradual opening of the economy would be helpful, return of consumer confidence and demand would be critical. On current reckoning such growth normalisation can take up to 2-3 quarters.
In a post-Covid world, the new normal for India Inc. will likely involve dealing with a defensive consumer, cautious borrowing and lending practices, conservative capital investing by corporates, greater digital and online intervention and even higher dependence on state support for driving growth in the system.
If investors are to prepare for a lengthy sideways market, how should they construct their portfolio?
At Invesco, we prefer a calibrated approach at all times. Markets are currently at a stage where one cannot be overly aggressive or defensive. Trajectory of economic recovery is unclear and the next few quarters may necessitate constant readjustment on either side. Hence it may be in one’s best interest to take a middle path to portfolio construction with regard to sector exposure, market cap bias and a good balance between growth and value stocks.
A typical portfolio can comprise a core of all-weather stocks, which forms the backbone of the portfolio; a middle of high-conviction growth/value opportunities and a tail where the investment proposition may not be adequately clear at the outset and can evolve with time but also does not hurt meaningfully. Keeping in mind present uncertainties, investors would be well-served by participating through low to medium risk multi-cap equity strategies and a fixed income component comprising ‘AAA’ corporate and short-duration debt funds.
Are the names that fell less during the initial sell-off more likely to lead the recovery?
The recent correction has been a typical in the sense that it has been led by the BFSI sector, which not only is the largest sector of the economy but also has a fair representation in the indices. Given that the sector will bear the maximum brunt of the economic weakness and will also be equally benefited as the situation normalises, it is hard to think of a market recovery without the comeback of the BFSI sector. While components within an underperforming sector may behave differently in a recovery, my expectation would be of a fairly equal participation by various sectors by rotation.
Are the so-called quality names likely to continue delivering outperformance? Or do you expect some rotation in preferences?
Quality businesses will outperform most market conditions, since what defines them as quality is their ability to add value during most times and hold on to value during difficult ones. Quality, however should not be construed to imply only large businesses but will also comprise several mid/small sized companies that display the right competitive advantage to prosper during good times and protect franchise during tough periods. A sharp recovery in beaten down cyclical businesses in the short-term is possible.
What moves are you making in your portfolios to weather the storm?
We currently are taking a calibrated approach. While our portfolios to a substantial degree are built bottom-up, as an overarching theme, we are eschewing excessive leverage in any business that can threaten the franchise. Within BFSI we have a greater leaning towards stronger banks and non-lending entities even as we run with a reasonable overweight in sectors such as consumer discretionary, telecom and healthcare. We are presently underweight consumer staples and neutral IT services.
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Is the economic stimulus package lacking firepower or does it have enough bite?
The fiscal stimulus reflects the fine balance the government has to achieve between the need to do a bare minimum for the most distressed parts of the economy as a consequence of the lockdown and its ability to do so. The stimulus makes an honest attempt to provide some solace to SME/MSMEs, NBFCs, farmers, migrants and states.
Given that the bulk of the initiatives are in the form of credit guarantees, the impact and utility of many of the elements will only be known with time. While in the first instance it will help spur credit demand within the intended sectors, it is the subsequent outcomes on credit behaviour and credit quality that will determine the success of the initiatives. Tying up some loose ends along with some clarity around implementation and execution details can make the overall program reasonably effective. What’s interesting is that the government has also chosen to expedite a few structural reforms, some of which like opening up the market for agricultural produce, commercial mining, hike in FDI for defence to 74% and further push to privatization could have important positive long-term ramifications.
Is the market past its fear phase? Or are we likely to see another sharp sell-off?
I would think markets are past their point of peak fear. There is a very low probability of equity markets globally as well as in India re-testing the lows seen during March 2020 due to the following reasons: There is evidence of control over the pandemic across many parts of the world due to lockdown and social distancing initiatives over the last 3-5 months.
Strong fiscal and monetary stabilisation measures have been initiated by various governments across the world. Varied efforts at treatment and cure of the virus at multiple medical institutions around the world are in progress. Economies globally are attempting to emerge from a lockdown. It would take significantly bad news for markets to revisit recent panic bottoms.
Is the recovery likely to be much longer drawn out than what market indicates? How is the ‘new normal’ likely to shape up?
While from a supply-side perspective, the gradual opening of the economy would be helpful, return of consumer confidence and demand would be critical. On current reckoning such growth normalisation can take up to 2-3 quarters.
In a post-Covid world, the new normal for India Inc. will likely involve dealing with a defensive consumer, cautious borrowing and lending practices, conservative capital investing by corporates, greater digital and online intervention and even higher dependence on state support for driving growth in the system.
If investors are to prepare for a lengthy sideways market, how should they construct their portfolio?
At Invesco, we prefer a calibrated approach at all times. Markets are currently at a stage where one cannot be overly aggressive or defensive. Trajectory of economic recovery is unclear and the next few quarters may necessitate constant readjustment on either side. Hence it may be in one’s best interest to take a middle path to portfolio construction with regard to sector exposure, market cap bias and a good balance between growth and value stocks.
A typical portfolio can comprise a core of all-weather stocks, which forms the backbone of the portfolio; a middle of high-conviction growth/value opportunities and a tail where the investment proposition may not be adequately clear at the outset and can evolve with time but also does not hurt meaningfully. Keeping in mind present uncertainties, investors would be well-served by participating through low to medium risk multi-cap equity strategies and a fixed income component comprising ‘AAA’ corporate and short-duration debt funds.
Are the names that fell less during the initial sell-off more likely to lead the recovery?
The recent correction has been a typical in the sense that it has been led by the BFSI sector, which not only is the largest sector of the economy but also has a fair representation in the indices. Given that the sector will bear the maximum brunt of the economic weakness and will also be equally benefited as the situation normalises, it is hard to think of a market recovery without the comeback of the BFSI sector. While components within an underperforming sector may behave differently in a recovery, my expectation would be of a fairly equal participation by various sectors by rotation.
Are the so-called quality names likely to continue delivering outperformance? Or do you expect some rotation in preferences?
Quality businesses will outperform most market conditions, since what defines them as quality is their ability to add value during most times and hold on to value during difficult ones. Quality, however should not be construed to imply only large businesses but will also comprise several mid/small sized companies that display the right competitive advantage to prosper during good times and protect franchise during tough periods. A sharp recovery in beaten down cyclical businesses in the short-term is possible.
What moves are you making in your portfolios to weather the storm?
We currently are taking a calibrated approach. While our portfolios to a substantial degree are built bottom-up, as an overarching theme, we are eschewing excessive leverage in any business that can threaten the franchise. Within BFSI we have a greater leaning towards stronger banks and non-lending entities even as we run with a reasonable overweight in sectors such as consumer discretionary, telecom and healthcare. We are presently underweight consumer staples and neutral IT services.
Click here to download ET Online’s guide to everything personal finance in the times of Covid-19
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