Currency should be stable. Recent fall in the rupee due to record selling by FII’s over the last couple of months in both debt and equity markets This should stabilize as FII selling abates.

Share markets took a massive blow earlier this year tanking significantly, making equities available at attractive prices for investors who wish to jump in. But investors looking to dive in are faced with a tough question — how to make the correct bet? Prashant Jain Chief Investment Officer, HDFC Asset Management Company might have an answer. In a recent conference call with investors and advisors, Prashan Jain said that equity investors need to forget what the current year has done to the stock markets and focus on the next years’ earnings while keeping a watchful eye on what will revert to normalcy faster than others. Here are the key highlights prepared by a wealth management firm present on the call.

Economic Overview

• Lockdown has had a significant impact on the economy
• With two months of lockdown, already the overall impact is about a negative 8% on the GDP
• Remains to be seen if the pent up demand will lead to improvement in the overall things or the adverse impact of the reduction in wages be greater
• Fiscal Deficit of the country likely to go up sharply considering governments expenditure
• PSU’s and Government arms should spend more – Infra capex should be boosted to create more jobs, services and demand for materials
• Industrial capex will be pushed back. Sufficient surplus capacity available currently.
• Interest rates should be kept low for a prolonged period
• Massive surplus in the liquidity in the economy
• Lower interest rates will boost consumption over time due to reduction in EMI’s (down almost 40%). Lower interest rates will help but will take time
• On external front, India’s situation is better off considering lower oil prices, lower gold imports and lower imports of discretionary goods – we might see a year of trade surplus
• Currency should be stable. Recent fall in the rupee due to record selling by FII’s over the last couple of months in both debt and equity markets This should stabilize as FII selling abates
• FDI inflows likely to be strong
• Government should divest aggressively and unlock value in some of the good PSU’s
• Most companies will be undertaking cost cuttings, MSME’s reducing manpower
• In the last decade, the consumption was supported with rise of borrowings, leading to lower savings rate for the country. COVID may break the consumption cycle.
• Economy likely to be driven by Investments now and not consumption
• Govt. may try to raise funds overseas

Impact on Markets / Sectoral Overview

Impact on profits for Nifty companies to be limited due to its composition.

• Banks

• • One-third of the index
  • Large banks likely to come out stronger from the crisis
  • Lots of value in some of the large banks – some available at 1x book value
  • Plus valuable subsidiaries like life, non-life insurance, credit cards etc.
  • Small banks not able to raise liabilities – deposits moving to larger banks

• Oil & Gas

• • Primarily Reliance (12% of the Index)
  • Appears to be fairly valued but with strong triggers going ahead. Currently, market ascribing half the value from telecom venture

• Software

• • Well placed; earnings might see a 5-10% decline this year primarily on cost pressure, pricing pressure and growth issues
  • In tough times, outsourcing increases
  • Many companies at attractive dividend yield of 3-5%

• Pharma: Sector doing reasonably well
• Construction

• • Profits likely to be down by 15-20% this year
  • Reasonable order book for the next 4/5 years
  • Companies like L&T at lifetime low valuations
  • L&T is now 10x the number 2 player in the sector – many mid-sized companies have gone bankrupt

• Utilities

• • Both public and private companies are cheap
  • Available at a dividend yield of 6-15%
  • Strong businesses, well regulated, low debt companies trading at a discount to their book values
  • Power demand can come back to near-normal levels

• Consumption / FMCG

• • Overvalued
  • Discretionary spending/consumption might see a pause, considering consumption was primarily driven by loans. Lower-income groups have less savings, plus considering reduction in savings might impact consumption going forward.
  • Even white goods / brown goods companies can currently be avoided eg. Havells

• Auto

• • At a risk as 20/30% decline in volumes can have a catastrophic impact on the profits
  • Example discussed Eicher Motors

Discussion on the debt markets

• Interest rates will remain low – currently overnight rate at 2%; liquid at 3%; ultra-short term 4%
• Fixed-income returns to be low at about 4-4.5% going forward
• Credit market industry about Rs 40-Rs 50k Crore. One fund house had an issue because of structured credit in the portfolio, which were not very liquid. With redemption pressure, and the Indian bond markets being shallow, led to a situation when they were unable to liquidate. The situation has led to risk off and investors rushing for higher quality papers.
• As a result, AA Spreads over the Gilt has risen to almost 4-5%. Opportunity in certain bonds like Tata Group, SBI etc.
• Comfortable on Perpetual bonds of frontline banks. Since rates coming off, higher interest rates perpetuals may get recalled earlier.

Other points discussed:

• The years of heavy FII selling have historically been the best years to add equities
• The impact of the current crisis is different across sectors, and best to view each sector separately – should not extrapolate the impact of one sector on others.
• Current Market Cap – GDP ratio of ~60% has been seen only three times in the past. 2/ 3 year equity returns have been in the range 15-20% from such a point. However, we are facing a different situation this time – as the current year might be a washout.
• Many companies available at attractive dividend yields – at equal or higher yields than bond yields
• Real estate pain may last longer – rentals being renegotiated downwards
• Pent up demand in the affordable segment (Rs 40-80 lakh) might  be strong with lower EMI’s

What to look for in the businesses to invest:

• Ignore the current year, focus on the next year earnings, and see which businesses will:
• • Revert to normal faster than others
  • Balance sheets are not at risk
  • Business model will not undergo major change
  • Fixed costs are less
  • Valuations are attractive