Money Control, Jul 25, 2019
We expect the current quarter to be amongst the worst quarters of the past 3 years in terms of earnings.
Those who panic and sell in the current market will find it difficult to move back in and could miss the next move higher. Corrections are at par for the course, and every 3 odd years, we get a 20 percent correction, Sunil Sharma, Chief Investment Officer, Sanctum Wealth Management, said in an interview with Moneycontrol’s Kshitij Anand.
Q) Nifty50 fell below 11,300-11,400 levels in the week gone by. What factors have triggered the sudden meltdown?
A) The selloff has been triggered by several factors such as disappointment with the Budget, super-rich surcharge on FPIs, lack of stimulus for consumers and weak earnings.
Every few quarters a fairly worrisome and painful market correction unfolds.
The trend was seen in 2018, 2016, 2015, 2013, 2011, etc. Each time, the market resolved excesses and recovered, and ultimately moved higher over time.
At such times, an investor’s returns are determined not by their investment analysis but by their investment behaviour. We are fast approaching a similar time where the behaviour of investors will be a key determinant of their future returns.
Those who panic and sell in the current market will find it difficult to move back in and could miss the next move higher. Corrections are par for the course, and every 3 odd years, we get a 20 percent correction.
Q) The FM, in her Budget announcement, proposed tax surcharge on the super-rich. Could this result in fierce selling by FIIs?
A) The market has witnessed selling after Nirmala Sitharaman denied removing surcharge on FIIs. However, we think that the selling will subdue soon. Investors will flock back once the market bottoms, which will drive the growth in the next leg.
Since most investors cannot time the bottom, averaging into equities as the selloff unfolds and having a plan to average in at various levels is the prudent response to what we are witnessing.
Q) Any big surprises or disappointments you have spotted from India Inc. so far in the earnings season?
A) The June quarter will be among the worst quarters of the past 3 years in terms of earnings. Early reports suggest as a slowdown in the economy, though we cannot comment on individual companies.
However, we need to keep a few points into consideration. One, there is a global coordinated rate cut response underway, with RBI having reduced rates thrice as well. This has in the past resulted in a recovery in the economy. Monetary policy transmission may take a few months, but it will make its way to borrowers.
Second, we are in a structurally low inflation environment and our real rates are amongst the highest in the world.
Third, we would urge investors to keep in mind that some of the weakness in the prior quarter as a result of uncertainty around the elections and that needs to be discounted.
In recent weeks leading up to the election, most of the clients we spoke to were on the sidelines, waiting and watching, both from an investment and business perspective.
Q) Nifty could well be trading around record highs but there is an absolute mismatch as to what is happening in terms of valuations and also the economic fundamentals. Is that a scary situation for investors?
A) Valuations are a function of interest rates and earnings growth. Excluding PSUs, the growth has been fairly decent and our analysis found that earnings growth is better than what the index demonstrates.
Valuations in a low inflation environment are by definition going to be higher since real profits accrue to investors. We wouldn’t be too caught up in single factor-driven investing, such as PE.
Investing is driven by a whole host of factors. Incidentally, a bottom-up computation of the Nifty50 PE is indicating that the Nifty50 is selling at high teens multiples using FY20 EPS.
That’s hardly expensive by any stretch of the imagination. Investors may be over-estimating the over-valuation. Similarly, smallcap valuations have also become quite attractive, in the midteens.
Q) Legends have said that long term investors should buy the ‘fear’. What is your view on this?
A) We would agree. We are getting close to the bottom but not there yet. Since it is difficult to time the bottom, we’d be buyers as the markets head lower, we’d be shifting from bonds to equities, and increasing our allocation to equities gradually.
Q) People are losing money in markets. Most of the funds have not given returns as one would have liked. How should investors structure their portfolio or what should be their strategy?
A) Some funds have destroyed investor wealth falling 20-40 percent. However, our largecap fund has delivered positive returns during 2018 and has not had a losing quarter since early 2016.
We define a losing quarter as a 1 percent loss. Our multicap fund had a single digit loss last year after a strong 2017. So, it all comes down to the portfolio manager and manager selection. Competent advisors are equally important.
We actively reduced our exposure to mid and smallcaps last year and avoided deep losses. That is the job of the active manager.
Unfortunately, investors, today are pulled into schemes by marketing pitches, when what they need is competent, experienced advice on structuring portfolios and selecting prudent managers that are responsible in terms of risk exposure.
Q) How long can before HRITHIK (HDFC Bank, Reliance Industries, Infosys, TCS, HDFC, ITC, and Kotak Mahindra Bank) stocks take the market higher? After some points, these too will fail as most of them are already trading at high valuations (TINA factors playing out, maybe). Unless the broader market starts to perform do you think we are unlikely to break out into unchartered territory?
A) As long as these companies deliver on performance, they will continue to move higher. Corrections will happen along the way.
We disagree with the notion that these companies will fail but they could certainly disappoint on growth. Some of these stocks have stellar management and strong barriers to entry.
One or two of them may not succeed but if you look at Amazon and Apple in the US, they have worked for over 20 years.
Certainly along the way business models will change and it is the job of the investor to identify changing conditions.