Many assumptions regarding GDP growth and earnings estimates will radically change for FY21, believes Manish Gunwani, CIO – equity investments, Nippon India Mutual Fund. In an interview with Ashley Coutinho, he says a lot of stocks are pricing in an extended slowdown and present attractive risk-reward trade-offs. Edited excerpts:

As things stand, what is your outlook for the market this year? Have the markets overreacted to the Covid-19 pandemic?

From an economic standpoint, the pandemic is likely to create a deep impact in the short term as many industries have ground to a halt, which is unprecedented. Hopefully, both the global and domestic economy should be back on their feet in the next three to six months. As far as the market reaction is concerned it is understandable from a near term perspective as many assumptions regarding GDP growth, earnings estimates, etc will radically change for FY21. From a longer term perspective we believe a lot of stocks are pricing in an extended slowdown and present attractive risk-reward trade-offs.

How are fund managers navigating the storm? Are you taking any cash calls or strategically reallocating money in any way?

We are not increasing cash calls at all and find the market more attractive today than three months ago, as valuations are much cheaper. In terms of reallocating money to a certain extent we are averaging some of the cyclical stocks we own and also adding to sectors which benefit from rupee depreciation.

What’s your view on the recent measures announced by the government and the RBI?

The policy boost by the government and the RBI will help the economy and financial system immensely. At this point of time the corporate sector across segments needs support and to a certain extent both the government and the RBI have delivered on that.

What is your view on earnings growth for FY21? What is your assessment on the impact of coronavirus on businesses and the economy?

It may be difficult to estimate FY21 earnings as the first quarter will be extremely stressful given the near halt of economic activity. It is probably better to assume that FY22 will have certain growth on FY20 earnings and to look at the market from that viewpoint. Also, the top two to three players in each industry may gain market share in the next few quarters as the balance sheet of the smaller players may get extremely stretched.

What is your take on banking and NBFC stocks?

Lending, by definition, is a leveraged business and any leveraged business will have a bigger adverse impact in a period where the global economy is facing one of its biggest shocks ever. The near term outlook is challenging, but over time the large banks with good liability franchise and diversified asset base should emerge as winners.

Which sectors are you betting on?

The theme we are advocating is buying the best balance sheet in cyclical sectors so that when the economy stabilises the survivors benefit significantly both from macro tailwind and market share gain from weaker players. We see such opportunities across several sectors such as auto, real estate, aviation, insurance and retail.

What is the outlook for systematic investment plan (SIP) flows and lump-sum investments?

The MF industry is seeing consistent inflows even now. While the near term returns have been weak, we believe that the market is attractively positioned for investors to increase lump-sum allocation. Our advice is that such extreme downturns should be used to increase allocation to equities. Increased equity allocation in 2009, 2013 and 2015, for instance, had benefitted investors a lot.