1 Sep 2020
The recent SEBI regulation on multi-cap funds saw some concerns. However, SEBI's intent was not to push mutual funds to buy mid and small caps at any price. They have an open-door policy. AMFI has given suggestions to ensure that they are true to their label of a multi-cap fund. I am hopeful of a solution in near future. Investors must avoid any knee jerk reaction in this case and continue to invest in multi-cap funds.
This time around, medical, economic, and financial crises have all come together. The impact of a medical crisis of this magnitude can be traced back to the Spanish flu in 1918 but one cannot learn from that situation because business and economic data of that time are limited.
So, in the current crisis, we do not have an anchor of experience. Volatility is high because of two counter forces at play. On the one hand, there is a medical, economic, and financial crisis, which is threatening growth. On the other hand, central banks and governments are printing money, cutting interest rates, and increasing fiscal support- essentially doing everything possible to ensure that growth doesn't fall off the cliff. Over the last 3 years, the Nifty has remained in the 11,000 range swinging like a pendulum between optimism and pessimism.
There are companies and sectors, which have outperformed since the last Global Financial Crisis. For instance, there are some companies in pharmaceuticals and chemicals, cement, financial services, and technology sectors whose profitability has grown anywhere between two to four times in the last 10 years. The re-rating in their valuation is partly because interest rates have dropped. So, the price-to-earnings (PE) ratio has expanded on the back of the low cost of capital for efficient companies.
But excess liquidity is driving penny stocks too. Investors have to be careful and look at fundamentals rather than liquidity-driven rallies in these counters in the near term.
In India, the RBI has been far more conservative compared to the Western world. Now, if we look at fiscal stimulus, certainly that will not be continuing forever. Even though everyone is throwing fiscal prudence out of the window, India is pursuing the path of fiscal prudence.RBI will be much conservative compared to them, but at least till such time growth recovers, which could be 4Q FY21 or 1Q FY22 on low base effect, RBI is likely to keep monetary policy accommodative by pumping liquidity
Clearly, this is a test match and not a T-20 cricket match. There are multiple levers available with the government and policymakers to pursue growth. First, growth revival will come purely from the medical situation, if we have a vaccine, normal economic activity can return.
Second, growth will come to India as globally interest rates are low and liquidity is high. We should be able to get foreign direct investments and foreign portfolio investment in a world where liquidity is surplus and rates are low. Global savings augmented with local savings will push our growth rate higher. Third, growth will come to India from factors like lower oil prices, lower gold imports, and a lower trade deficit with China. Fourth, growth would come in the agriculture sector since monsoon has been good and rural India has not been adversely impacted by the medical situation, yet. Growth in the agriculture sector will come from the recent farm reforms. Finally, growth can be better if India becomes part of global supply chain management. If we can grab a share of companies that want to move out of China and help them set up shop in India, we will change India's growth orbit.
India is taking steps to support growth but a lot needs to be done. Just cutting rates and providing money is not sufficient. There are multiple factors that bring an entrepreneur to a country. The first is perception. At this point, global companies' perceptions to do business in India have gone up versus China. People seem to be more comfortable investing in India compared to China. The second is the ease of doing business. Tesla took 12 months to start making cars in China and Tatas took 18 months to start making cars in Sanand. So, we can still cope if Sanand becomes the model for the rest of India*. The third is rule of law, which is very important. Entrepreneurs will come to invest when they believe rule of law will be honored. So our judicial system, our legal process, that needs to be at par with the best in the world.
We continue to advise regular and consistent investing through SIP. Distributors can add value by suggesting prudent asset allocation to their clients. Prudent asset allocation will be critical in helping ride out this period. A true to label Balanced Advantage Fund strategy that has low downside risk and higher upside potential provides a good investment option for those who looking to overweight equities as it will automatically take care of asset allocation in equity and debt depending on markets. Conservative investors can consider a debt hybrid strategy where the equity component is 25% or less. This strategy keeps the equity risk limited and allows for the debt component to anchor the investment and keeps volatility low and the equity component may deliver when equity markets enter a bullish period.
While investing in debt funds, one's investment horizon is very important. For eg in the liquid fund, a 7-day horizon is fine but if one is investing in a credit risk fund, the horizon could be up to 3 years. Investors would do well to listen to the prudent advice of their distributors rather than relying on social media gurus in this case. We continue to be bullish on gold because generally when interest rates are low and liquidity is high gold prices get supported. But one has to keep in mind the risk that there is a 12.5% import duty on Gold. So, God forbid, if import duty comes down then rupee gold prices will crash in one single day to that extent..
