Bhavesh Sanghvi, CEO of Emkay Wealth Management, who is an alumnus of Columbia Business School and NMIMS and has over 3 decades of experience, is of the view that we may see more companies beating the earnings estimates in FY22. A word of caution though – stick to your defined asset allocation.
Sanghvi is of the view that the infrastructure sector may receive more attention in Budget 2021. Overseas investors would focus on the path which the government would indicate to get the finances back on track, after a tumultuous year, he said in an interview with Moneycontrol’s Kshitij Anand.
Edited excerpts:
Q) The year 2020, which most of us thought could go down as a black year for equity markets is in fact turning out to be a year of fresh record highs, and a whole new meaning to life. What is your outlook for 2021?
A) The year 2021 is the year of hope, after the pandemic which has played havoc with human life and its existence, affecting the livelihood of millions of people across the world for the most part of 2020.
The coming year will potentially see the pandemic coming under effective control with the enhanced availability of the vaccine, and economic growth returning to the major economies.
With economic growth reviving, earnings would also grow, and employment and income too would rise with it. That is the hope for the coming year.
With the change in government in the US, it is expected that there would be a fresh and pro-active approach towards many issues both local and international, which may facilitate a more coordinated approach towards the settlement of several issues.
The coming year is critical as it will be the year in which we will leave an extremely disastrous year behind for a better future for all.
Q) In one word, if you must define the year 2020, what would that be and why?
A) The year 2020 cannot be compressed into just one word because of its very divergent impact on the different aspects of life and work. From a purely human perspective, it has been a tragic experience for a significant populace.
From an economic perspective, it is a year in which millions of people became jobless, millions of businesses closed, and widespread demand destruction happened across continents.
The markets, of course, after the fall in March, picked up the pace taking advantage of the liquidity glut created by central banks’ accommodative policy.
Fortune favours the brave, folks who stayed invested reaped the benefit s of this massive bull run that we are witnessing.
But, I would say that it was a year of reflection, a time when all of us looked at things differently in the light of the ravages of the severe pandemic and the destruction it brought with it, something that we are yet to come out of.
Q) What is your outlook on earnings for the year 2021?
A) The corporate earnings results for Q2, FY 21, have been better than estimates. The sales growth too was much better than estimates. Outperformance has come in the EBITDA.
The reduction in costs and the subdued input prices helped a lot in performance. As against the expected FY 21 GDP number, a contraction of about 8%, FY 22 may probably see a recovery in growth to 6%, and this will help improve in earnings in FY 22.
The performance of many key sectors like Healthcare, Cement, Metals, Banking, Auto have all reported better than expected performance on different parameters. The Nifty EPS growth has been weak, and in fact, contracted over the last few years.
But, a recovery in GDP growth and corporate earnings is likely due to various measures initiated by the government and the RBI, which will help recovery in EPS in FY22.
The valuations based on a TTM basis might look slightly expensive, but with the expected earnings pick up and EPS growth, the valuations would look more reasonable.
We may see more companies beating the earnings estimates in FY22. Having said that a word of caution is to stick to your defined asset allocation.
Q) The big event which will be in focus is Budget 2021. What are your expectations from the event? FM promised it to be a vibrant Budget and a lot of policies to support the economy have already been rolled out. So, what could cheer markets?
A) Recently, the budgets have not been the one-year forward traditional budget exercises. The budgets have been more of an instrument of perspective planning covering even a plan for the next five years or even a decade.
Therefore, the coming budget is likely to carry the same underlying tone as it was in the last two or three budgets. The incentivization of corporates and businesses, the job creators, is likely to be an underlying theme supported by the concept of self-reliance or “Atma Nirbhar Bharat.”
Infrastructure may receive more attention in this budget. The potential of any budget is its capacity to raise resources and spend more, as we know with the amount of fiscal expansion that was required to overcome the disabilities caused by the pandemic, the room for spending will be quite limited.
Since the fiscal math needs to be realigned to better fiscal discipline, the markets, and more importantly, the overseas investors would focus their attention on the path which the government would indicate to get the finances back on track, after a tumultuous year.
Q) What is the feedback that you are getting from FIIs/HNIs for India?
A) We have seen record inflows from FIIs in the last six months. This is money which is intending to capitalise on the opportunities available in the emerging markets, which have relatively stable economies and potential for faster growth, to which category India belongs.
Aggressive fiscal and monetary policies and the scope for higher returns attract global investors especially when there is the cloud of uncertainties enveloping many of the developed economies.
As you may be aware, bond markets in Europe are trading at zero yields. The Fed’s as well as the ECB’s quantitative easing through asset purchases has put trillions of dollars into the market.
This money is bound to look for better returns which other regional markets provide. One should be seized of the fact that these monies could move out as economic conditions change over time.
Coming to HNIs, it can be said without an iota of doubt, that compared to any time in the past, HNI’s have fairly long-term investment portfolios. This observation is based on the portfolios that we look after, and many more that I happened to review over the past couple of years.
This long-term orientation may be due to several factors like the enhanced availability of more objective advice, the anchor provided by past investing experience, the availability of multiple products, and more a than anything else the ability to discern the opportunities based on both risk and return.
While HNI’s continue to make investments, many who have initiated investments in the March to September period may be booking profits on their tactical positions.
Domestic mutual funds are witnessing record outflows, this may be more to do with the severe underperformance the industry has shown largely Vs the benchmarks. It’s been a very difficult market to outperform. Every leg if the market has had new winners.
Q) Bitcoin outperformed most of the asset classes. Do you think it is time for investors to take cryptocurrency seriously and add some percentage to their portfolio which could be part of global diversification?
A) It is true that bitcoin is appreciating, but we have seen it falling too. Outperformance by itself is not a sound criterion for investment.
Also, it is not imperative that one should be investing in anything that is likely to appreciate in the future. Further, the regulatory framework around such new instruments requires more clarity before one can invest in it. It is a nationless currency, and therefore, not legal tender, and there needs to be clarity on who regulates it.
There were some instances where bitcoin was used for socially harmful activities. Also, at best it may be termed a commodity, and taxes are applicable when you sell it if there are capital gains.
With enhanced digitization, cash or money substitutes may find favour with investors, progressively. Ray Dalio calls them “gold-like asset alternatives.” I remember the time when art funds were an investment destination in India, and it was very actively promoted by many wealth management companies. But, at the end of the day, it resulted in a loss.
Alternatively, I would be happy to recommend diversified global funds to investors who are looking to invest in non-Rupee assets and also wanting to diversify geographically. There is no harm in having an allocation of 5 to 10 percent of the portfolio to such funds.
Q) Any new trends in terms of sectors which you are seeing that could last for the next couple of years?
A) The sectors that are basic to economic life are the ones which will do very well most of the time. These would include banking and financial services, technology, pharma and healthcare, consumption-oriented themes etc.
This has been broadly the trend the world over. Now, we may see some variations in the weights to these sectors depending upon the immediate perceptions about the economic environment.
In India, we have seen the bank index lagging the overall rally, with the index at around the 22000 levels for a few months but in the last two months the index has moved up to 30,000, and so the catching up is over.
This is true of overseas portfolios also as many portfolio managers were overweight tech and healthcare and underweight banking. Apart from the four sectors mentioned above, the agri- related businesses and specialty chemicals also are likely to do quite well.
Q) Your key learnings from the year 2020? And what would you advise investors to follow in the coming year?
A) The year 2020 has proved beyond doubt that even events that may seem to be big disruptors have two sides to it. The pandemic too proved to be one such event that helped us re-orient our approach to the way we look at things and also reorganize our investment efforts, and benefit from that.
The opportunities which the market offers are beyond our imagination. The events also highlighted the importance of maintaining asset allocation as one of the fundamental principles that one should follow all the time.
In the last crash in March, the indexes had dipped so low that the intrinsic value of so many stocks were higher than their prices, with the price to book at the lowest levels.
It is quite obvious that if the prices fall below the intrinsic value of an asset, the price will ultimately move up to much higher levels.
Q) Value or beta – what would be more popular in 2021 and why?
A) Growth would continue to be the focus along with quality and ESG because returns are the result of higher-than-average growth compared to other businesses, the industry, and the market.
The value may be talked about more as it has been less talked about for a long time now. But with the economy in an expansionary mode, there could be many value traps which one should be careful about.
Smart beta strategies have been in vogue for a long time now with the objective of better returns with diversification, and lower risk.
That is nothing but seeking outperformance at lower risk, a deviation from the market-capitalization-weighted benchmarks. But growth will continue to be the fundamental overriding consideration.
