Net inflows into equity mutual funds slumped 47 per cent in April to Rs 6,213 crore from Rs 11,722 crore in March as investors grappled with uncertainties amid the COVID-19 pandemic. In an interaction with THE WEEK, Waqar Naqvi, chief executive of Taurus Mutual Fund, shares his thoughts on the market reaction to the stimulus being announced by the government, why investors should continue to bet on equity funds and where the opportunities to invest in the current crisis are. Excerpts:
How do you view the stimulus announced by the government? Will it have any material impact on the economy and in turn capital markets?
All the contours of the stimulus are not yet clear. However, whatever has been announced till date, apparently, does not entail noticeable cash infusion. The initial reaction of the stock market does not indicate that it is enthused by these announcements. On the other hand, the announcements, though they will increase the fiscal deficit, may not make it go as high as expected. We need to, however, wait and see the future announcements by the government given that COVID-19 is not going away soon and will be with us for some time.
Equity markets have seen a mini rally of sorts since the lows touched in March. What is driving the markets?
The government initiated strong steps (predominantly the lockdown), which provided a ray of hope to investors. Some other investors would have bought because the prices of some blue chip stocks fell after quite a few months and they found the prices relatively more attractive than the ones prevailing some months back. The next 2-3 months will be a better indicator to understand if investors are understanding or ignoring the potential impact of COVID-19.
Given that the wider economy is going to be hugely impacted due to the pandemic, how do you see markets panning out in 2020-2021?
We do not see the stock markets gathering steam until September-October. It may be a volatile yet downward journey from now till October end. Beyond October, it will depend on how the different factors affecting the stock markets play out (likely chance of some businesses showing signs of moving from China to India or strong steps by the government etc.) Once the gloom has run its course, we may see a huge bull market unless we do something dramatically wrong and shoot ourselves in the foot.
Is it still a good time to invest in equity funds or is balanced advantage funds a better and safer bet?
Equity funds would be my bet. Generally, we all know that equity funds are for the long term. The debate always was whether long term means five years or 10 years or more. This time, however, chances of getting a good return from equity may exist in a period of three years. All said and done, there is a general consensus that the Indian economy will be hit much less than the economies of the developed countries.
Midcap and small cap stocks had fallen sharply even before COVID-19 hit markets. Should one increase allocation to these funds or would it be wiser to stick to the large caps?
Large cap companies with proven track record, better leadership, stronger balance sheet and cashflows are always better placed to weather any crisis/challenges as compared to midcap and small cap companies. If I were to invest my money, I would invest 70-80 per cent in large cap funds and the balance in mid cap funds, which have a proven track record of consistency and generally invest in strong mid-caps. This should be the case till we have clarity on the path towards economic recovery given the COVID-19 situation.
Sectorally, where do you see opportunities to invest?
Many corporates with strong franchisee/moat, strong cash flows, sustainable growth and visibility are available at a considerable discount (in some cases as high as 40-50 per cent discount) from their peak. On the other hand, there are also some companies available with higher dividend yield or with zero or negligible loans. These companies should be a good tactical bet. Sectorally, we are bullish on pharma, diagnostic, telecom, FMCG and other consumer facing companies.
What makes you bullish on the consumer sector?
The discretionary side of the consumer segment is expected to suffer over the next two quarters (June and September) at least as most of the consumers would be cautious and as a result avoid expenditure where ever they can, given the uncertain environment and till the sentiment rises again in the economy. However, the daily need and essential items may continue to do well. Most companies in this segment have a strong balance sheet and are expected to bounce back relatively quickly.
Talking of consumption, how do view auto companies? Will the sector see a recovery after prolonged underperformance?
Leaders like Maruti, Bajaj and Hero MotoCorp have seen the worst month in their history in April. While this was due to COVID-19, it came on the back of a not-so-great financial year ended March 2020 for the auto sector. The next six months may continue to be challenging and it may need policy support like incentives, scrappage policy etc to come out of the situation in which it finds itself. The two wheeler segment should be the first one to recover though their sales may not match the numbers they churned out in FY2020 or in FY2019 given that the discretionary spend would be lesser by consumers.