DAILY VOICE | Vinit Sambre of DSP Investment Managers is positive on economic upcycle; advises to remain invested in equity

Vinit Sambre, Head Equities and Fund Manager at DSP Investment Managers, is of the opinion that the market is factoring in improved macro-economic outlook as the measures announced by the government to revive the economy will aid growth.

"The record-high levels of the market follows a strong earnings upgrade season which we are seeing after many years of downgrades," said Sambre in an interview to Moneycontrol's Sunil Shankar Matkar.

He remains positive on the economic upcycle and advised investors to remain invested in the equity markets. Edited Excerpts:

Q: What is the trend observed at the FII desk now, in terms of buying and selling in the domestic market?

After a good start in Q1 CY21, where FIIs poured in $7 billion into Indian equities, the flows have started weakening with an outflow of $500 million from April 2021 upto June 2, 2021. The current surge in COVID has made the FIIs a bit cautious. The interest could come back as the cases recede and lockdowns are lifted.

Q: Given the market is at record highs, what should investors do now?

Markets are factoring in an improved macro-economic outlook as the measures announced by the government to revive the economy starts aiding growth. The record-high levels of the market follow a strong earnings upgrade season which we are seeing after many years of earnings downgrade.

Most of the companies have managed their business quite well in this challenging time. An analysis of NSE500 companies suggests their net debt has declined by around 33 percent as on March 2021 as compared to March 2020 (results announced so far). Similarly, higher margins and better working capital management has led to expansion in return on equities (ROEs) by over 300 bps to 12.8 percent in FY21 for the same set of companies.

While some challenges have emerged recently due to rising input prices, we believe these are caused due to supply-side bottlenecks and would be transient in nature. We remain positive on the economic upcycle and investors could look to remain invested in the equity markets.

Having said this, investors should avoid investing in the market with a short term view due to the low margin of safety in the markets due to expensive valuations currently. The other risk is the increasing appetite of the investors to invest in low-quality stocks. This is something an investor needs to avoid as there is a risk of eventual capital erosion in such names.

Q: After three months of consolidation, the market returned to record high levels. Do you expect the momentum to sustain and push Nifty towards 20,000 and Sensex near 65,000 mark in the coming year?

I would like to avoid giving any levels for the markets for the short term as I consider it to be too speculative and is equivalent to throwing dice.

Q: Do you think the expected recovery post easing of lockdown will help India report double-digit growth in FY22?

While much is dependent upon the timing of the lifting of lockdowns, our base case assumption is that the earnings are likely to report double-digit growth in FY22. We are assuming gradual lifting of lockdowns, starting June. It is very obvious that businesses should not miss out on important festival months during this year for our assumption to hold true.

Q: What are the sector that can be added to one's portfolio amid the COVID crisis, and why?

We believe the banking sector is one to look at as they are adequately capitalised, have managed the asset quality impact well and are likely to be beneficiary of economic recovery going forward. We have also looked at few engineering companies which are likely to be the beneficiary of the production linked incentive (PLI) investments and growth of the manufacturing sector over time. Healthcare has been one of our favoured sectors as health has assumed priority globally and Indian companies due to their global presence have a much larger target market to capture.

We believe the consumer sector, both discretionary and non-discretionary, are good long term plays but have rallied ahead of their near term fundamentals and we would look at them in weakness. We also like the agricultural sector due to the long run-way of growth available given the under penetration in the category.

Q: Given the improving economic data points in the US, do you think the Federal Reserve can hike interest rate and slowdown bond purchases plan in the second half of 2021?

Instead of trying to predict the timelines of when the Fed would start hinting at a rate hike, it would be prudent to believe that investor would have to face this eventuality at some point and be prepared for the same. It is also likely that a stronger economic growth outlook may precede this event and could potentially limit the risk of drawdown that one is anticipating right now.