‘We are sitting on some cash to take advantage of volatility’

Government stimulus and a surprise rate cut by the RBI has kept markets busy over the past fortnight. JYOTIVARDHAN JAIPURIA, founder and MD of Valentis Advisors, tells

Puneet Wadhwa in an interview that investors should follow a ‘barbell approach’ while investing, with their portfolios consisting of stocks immune to shocks in the near term, and also those that have long-term earnings potential. Edited excerpts:

What is your outlook on the markets?

We are seeing a triple shock — medical shock, and the consequent supply and demand shocks. Finding a medical solution to Covid-19 will determine the shape of the market. We assume there will be solution in the form of a medicine or vaccine, over the next 24 months. While FY21 will be tough for the economy, FY22 will see normalisation, setting the stage for markets to revert to earlier levels. In the near term, however, there remains a lot of uncertainty. We have, therefore, been keeping some cash in the portfolio to take advantage of any volatility.

What’s your view on the measures to fight the economic fallout of the pandemic?

First, the focus on helping the economy has fallen on the monetary policy rather than the fiscal side, probably because of the already-deteriorating government finances. The RBI — doing the heavy lifting — has focused on providing liquidity, cut interest rates, and eased borrower stress. The challenge now is to reduce risk aversion among banks.

Second, the government has chosen to provide support mostly through guarantees to micro, small, and medium enterprises (MSMES) and cash transfers to the weaker sections. The market has been disappointed by the lack of fiscal support, which may be required to stimulate demand. Hope remains that the government will step up its spending once the economy opens up. Third, the government has brought a transformational move in the agricultural sector by dismantling APMCS. They should further ease business through legislations, such as land and labour reforms.

There are expectations of another round of stimulus by the US Fed. Will other central banks follow?

Central banks globally will do everything to help kick-start the economy. Liquidity will be easy in the world and interest rates low, with negative rates likely. Bond yields remain low for now. Liquidity infusion has helped and will continue to aid equity prices.

What should be the strategy of investors?

They should follow a ‘barbell approach’ to get a mix of sectors that are relatively immune in the near term and those that are cheap but could deliver high returns in the next few years despite near-term stress.

On the one side, you will have sectors like FMCG, pharma, and software that have been relatively immune. Here, our preference is for pharma and telecom. On the other side of the barbell, consumer discretionary (we like tractors and two-wheelers), gainers from rising rural income, and gainers from infrastructure spend by the government (like cement) could deliver higher-than-normal returns over the next few years.

Your estimates for corporate earnings for FY21 and beyond.

Earnings in Q1FY21 will fall deep in the negative territory, with many entities reporting a loss but gradually recovering as factories start humming. Overall, the Nifty EPS for FY22 will be in the ~600-650 range, with a fair bit of volatility in the next few quarters.

How weak has the pandemic left the Indian financial sector?

We were just coming out of a period in which we had provided for earlier non-performing loans (NPLS), and the future was looking robust. Covid-19 will lead to another round of NPL provisioning, since firms don’t plan for scenarios of zero sales. Overall, this will lead to consolidation. Within the lending space, we will be more bullish on a large bank space. The insurance sector, as a theme, has a long way to go, given its under-penetration.

How are things shaping up for the telecom sector?

The telecom industry is in a sweet spot, given three factors. First, data is becoming the new oil. The growing demand for data has been accentuated by the lockdown, and will continue with work from home, reduced travel, and fewer physical meetings becoming the norm. Second, the industry has seen consolidation into three players, and tariffs are likely to rise. Third, raising equity from external sources appears possible at favourable terms. The payment of AGR dues remains a pain point, and the government may provide easier terms of payment.