Equity markets plunged over 1.5 per cent on Monday as bears appeared to tighten their grip as the number of cases of the Omicron variant continue to rise, fuelling uncertainties and raising the spectre of a potential third wave of the pandemic, making investors nervous.
The BSE Sensex closed 949 points down to 56,747.14 level and the Nifty 50 fell 284 points to 16,912.25 level. Since the life high of 62,245.43 touched on October 19, the Sensex has now declined almost 9 per cent.
Jinesh Gopani, head of equities at Axis Mutual Fund, says pandemic events like this new virus variant of Omicron could lead to significant volatility in the market. He feels investors should look at the long-term and the correction in stocks could provide an opportunity to buy good quality companies.
Q. Over the last 15-18 months, markets saw a huge rally. But, of late we have seen volatility set in, especially, after the news of this new COVID-19 variant. As we head towards the year-end, how do you see markets panning out now?
Markets went up for the right reasons. As you saw after COVID 1.0 the economic recovery was good and hence the companies also bounced back nicely on their business models. Even after COVID 2.0, the economic momentum continued. That was due to government support, in terms of infrastructure development and also the ECLGS scheme (emergency credit line guarantee scheme), which helped the smaller players stay afloat. Most of the companies that reported earnings for the September quarter have come back to pre-COVID levels. The cheap capital available in the world has helped companies to raise money at their will, either via qualified institutional placements or through IPOs. Now that we are back to the pre-COVID levels of growth, we need to see whether the quarterly numbers can continue to maintain the momentum.
Our expectation is that hopefully apart from this new COVID variant, which is leading to volatility in the market, we should be in a consolidation mode. Then as December and March quarter earnings numbers come, people will roll forward their estimates to FY24-25. That is how we see movement in the market.
Having said that, any kind of pandemic event, like this new variant or any other thing, will lead to significant volatility in the market.
Q. Amid this market volatility, would you continue to invest or hold on to some cash? '
What we are advising our channel partners and investors is to look at the long term as the near-term can be very volatile. If there is a 5-10 per cent correction, one should not be too worried, unless there is a pandemic event. This 5-10 per cent broader market correction, will mean some stocks will correct 15-20 per cent and then it again becomes an opportunity to buy into good quality stories.
Q. Talking of good quality, where do you see investment opportunities right now?
There are new themes emerging in the market, in the form of platform-based or internet companies. These are supposed to be high growth stories. If you have a higher appetite, one can park some money on that side. Otherwise, companies who are changing their business model and upping their game and have survived this last 18-months COVID phase, would become big winners in the next few years. There is a massive shift from the unorganised to the organised given issues with unorganised players related to funding availability, raw material availability and labour availability, which has led to disruption in their business model. Whereas the listed and organised guys have seen their business come back to pre-COVID levels. So, these companies are becoming stronger, they are able to grab more market share and innovate more. So, our feeling is that companies, which will keep on innovating their business models, either by new product innovation or process innovation, will have the longevity of growth and money will flow that side.
Q. You mentioned the internet companies. There has indeed been a huge rush to go public and investor interest has been high too. Have you invested in some of them and what is your thought process, considering that most of them don’t make profits yet?
It’s a new way of looking at business models where growth is given more priority as compared to profitability. Having seen that playing out across the world and a few companies touching $1-$2 trillion in market cap, the idea is not to miss out on that space, but obviously be diligent in how much you are investing. So, we don’t go overboard on investments there, but we would have a basket approach. You don’t put all your money in one go, you nibble around in the market and as you see performances playing in terms of their business models over a 1-2-year period, then pick up a bigger stake. Ultimately, we are long-term investors. So, we would like to play the story at least over a 2-3-year horizon to understand the business model and then look for companies that deliver cash flow and profitability.
Q. India’s GDP growth continues to be driven by this huge infra spending by the government. Given that and we are also seeing demand picking up in sectors like real estate, do you think this whole construction, building materials will be a theme to play on?
If there is no third wave in India and if there is no significant problem around the new COVID variant that leads to things like local lockdowns, then we are in for a good growth trajectory.
Having said that, we all know where valuations are. So, obviously, it’s not going to be a straight journey, but a bit of a volatile journey.
Otherwise, given the Indian economy’s growth potential, if all goes well, then we are looking at 6-7 per cent real GDP growth for the next 2-3 years easily. As the economy improves, in terms of employment and wage hikes, there could be a significant consumption boom, maybe not now, but 12-months down the line. We have witnessed over the last so many years that direct-to-consumer companies have created a lot of wealth for their investors. So, this is a secular story, and if all goes well, you might be in for a super consumption cycle.
Q. In the last 18 months, two sectors – technology and pharma – gained a lot of traction. Now as some sort of normalcy is returning, as new COVID infections in the country have fallen and people are beginning to venture out to office, travel… what’s your outlook on these two sectors? Adoption of technology has become important for the survival of any business. So, the tech will show good growth at least over the next 2-3-year period. Even traditional companies are adopting tech like cloud computing, artificial intelligence, machine learning, process-driven automation. So, tech companies will show a good 14-15 (approximately) per cent growth rate with a good opportunity for investors to gain from dividends and buybacks.
In pharma, you need to go stock by stock and understand what therapeutic segments they are into and understand whether it’s a growth story or not. Between tech and pharma, if there is no third wave, tech will be a better play.
Q. What’s your view on mid-caps and small caps?
If there is no further disruption or a pandemic event, let’s say oil going to $100… If that happens then obviously, mid-caps will suffer more than large caps. But, if those things don’t happen and things remain steady, then the propensity for growth is higher in mid-caps than large caps. Having said that, valuations are also higher, so one needs to be careful at this juncture because of the volatile nature of the market in the short term.
Q. Passive investing has gained ground in the last couple of years. Axis MF too has launched index funds. Will it continue to gain ground?
There are different set of investors with different risk appetites. There are high-net worth investors going to PMS (portfolio management services) because they want higher returns, uniqueness of the model and higher concentration of the portfolio. On the other hand, there is a certain set of new investors, who are only testing waters and want decent returns, they are moving towards the passive side. Passive funds are low-cost products, so obviously, it’s good for the company also to bring in new investors and then maybe cross-sell the active products, which are more sophisticated.