Betting on healthcare, good quality industrials: Navneet Munot, SBI MF

With equity markets falling prey to coronavirus-induced volatilty, heavy lifting has to be done on the policy front, according to SBI Mutual Fund’s Chief Investment Officer Navneet Munot.

"The policy response on both these fronts will determine how quickly economic normalcy returns," he told Moneycontrol.

While these uncertainties may keep markets volatile in the near term, several valuation measures such as market cap to GDP and long-term earnings-based yield spread are in the vicinity of global financial crisis lows, suggesting attractive entry points for long-term investors, Munot said.

Sentiment measures too suggest that the pendulum has swung towards extreme pessimism which is positive for prospective returns in general. Also it is becoming increasingly clear that the unprecedented crisis will lead to unprecedented global stimulus

"As has been our long-held view, with monetary policy having reached its limit globally, fiscal policy will do the heavy lifting. This will mean more money in the hands of the masses and hence, more broad-based economic growth globally," Munot said.

This in turn will imply broad-basing of sector performance on the other side of the crisis.

"So, even as the near-term damage is inevitable, this may just be the trigger that forces global policy makers into decisive action for a better tomorrow. This is therefore a great opportunity to buy resilient businesses that should emerge stronger on the other side," he said.

Impact on companies

Over the past few years, with the formalization of economy gaining steam aided by events such as demonetisation and GST, strong businesses have continued to get stronger.

Munot believes the current crisis may force marginal players to shut shop. 

"Leveraged balance sheets may find it especially difficult to survive. This also implies that weaker financial services businesses, owing to inherent leverage at both company and customer level, may struggle to stay afloat," Munot said.

Companies that survive may be forced to become leaner. Adoption of digital technologies could explode to cut costs; however, potentially employees could be laid off too.

Investment plans may be pushed back as firms avoid leverage and focus on balance sheet health.  He feels, it is therefore imperative that the policy makers are aggressive and proactive in not just controlling the virus but also mitigating the second order economic impact.

"On the positive side, as global firms weigh reliability against efficiency, case for just-in-time and super concentrated supply chains may weaken. This amidst rising distrust of China could position India as a strong alternative," he said.

Impact on economy

According to Munot, there are two levels of impacts to consider on the economy: the direct loss of economic activity during the lockdown period and the second order impacts caused by business shutdowns, consequent loss of employment and the strain it puts on the financial system.

Both of these put together are likely to shave off a couple of percentage points from annual GDP growth in FY21, Munot said.

He pointed out that a recent study by Correia et al. (2020) based on US cities during the 1918 Flu pandemic, which suggests that not only do lockdowns lead to lesser mortality, but also faster economic recovery in the medium term.

"The government will have to lever up further in our view, given stretched household balance sheets on one hand and a risk-averse corporate sector on the other," he added.

The RBI will have to stay accommodative by absorbing government supply and keeping system flush with liquidity.

More importantly, Munot feels, RBI will have to ensure credit availability across the spectrum.

According to him, a large scale, one-time restructuring may be necessary to tide out this crisis even as philosophically this goes against the tenets of Asset Quality Review (AQR) and Insolvency and Bankruptcy Code (IBC).

Financial sector significantly impacts the real economy and must be protected at all costs, Munot said.

 Consumption of staples is non-cyclical in general and stays resilient in a down cycle. .

On the other hand, rural economy is likely to navigate the coronavirus-induced slowdown better than other segments of the economy.

Strategy, Sectors

While near term economic outlook is gloomy and there is pessimism all around, valuations are getting to levels attractive enough for the fund houses to make to deploy.

Munot said the fund house very bottom-up in their investment approach.

Healthcare for example has likely seen the worst of earnings cycle and valuations are quite attractive after years of derating.

Munot said, while it acts as defensive in the near term, it should also benefit as globally trillions of dollars get spent on healthcare as a response to the current crisis.

"As global policy makers respond to the economic disruption with unprecedented fiscal stimulus, investment activity and global trade could pick-up at some point in not so distant future. Good quality industrials therefore become interesting plays," Munot said.

He also said that several PSU utilities are trading at yields significantly above bond yields even as they continue to be growing businesses, offering good opportunities.

On the flip side, he feels, even as financials and discretionary consumption are likely to be the worst impacted in the crisis, the deep price cuts will make stronger, leading franchises will be attractive at some point.