This money manager says 3Cs behind selloff gone; its buying season on D-St
Investors on Dalal Street should not panic and continue to invest in equities systematically to achieve their life goals, as a major correction in the domestic equity market seems to be over for now, says Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance.
The market witnessed severe correction since August-end, creating an opportunity for long-term investors to buy quality businesses at cheaper prices.
Reddy attributed that selloff primarily to 3Cs – rising crude prices, currency depreciation and credit and liquidity related issues following a default by a large infrastructure lender.
The rupee has fallen nearly 15 per cent against the US dollar on a year-to-date basis, while Brent crude has slipped below the $70 a barrel mark.
Talking to ETMarkets.com, Reddy said stock valuations have become more reasonable now following the correction. He said Indias long-term growth story remains intact and is better poised than some of its emerging market peers.
Only 21 companies in the BSE500 index managed to deliver positive returns to investors between August 29 and October 26. On the other hand, companies like Infibeam, DHFL, 8K Miles, Bombay Dyeing, Kwality, Central Bank of India, Indiabulls Real Estate, Dilip Buildcon, YES Bank, Reliance Capital and J Kumar tanked up to 50 per cent. The benchmark BSE Sensex dipped 14 per cent.
“Factors including crude, currency and credit related issues have somewhat stabilised now. We feel a large part of the correction maybe already be in the price. However, uncertainty will remain high on account of the impending general elections in India. Global factors like monetary tightening by the US Fed and the ongoing trade wars could cause some more decline in the short term,” he said.
He said corporate earnings are showing signs of recovery after muted growth in last few years. Reddy says some of the sectors, which were a drag on corporate earnings in the past few years, may have bottomed out now.
Citing Warren Buffets famous quote: “Be fearful when others are greedy, and greedy when others are fearful”, Reddy said this recent correction provides an opportunity for long-term investors to buy on dips. He said investing in equities requires patience, discipline, and timing the market is a difficult proposition.
On a year-to-date basis, the correction has been much deeper in the broader market, especially in the smallcap and midcap space. The BSE Midcap and Smallcap indices have dipped up to 30 per cent so far this year. Reddy is advising investors to consider some allocation to these segments, too.
“We have been advising relative preference for largecaps compared with smallcaps and midcaps since late 2017 due to the relatively elevated valuations in the latter, and positioned our portfolios accordingly. However, after the sharp correction that we have seen in small and midcap space this year, the valuation premium of midcaps over largecaps has come down significantly. Although we still prefer largecaps more from a risk-reward perspective, the deep correction in the midcaps and smallcaps (particularly quality stocks) is starting to present some selective value propositions, and long-term investors can consider partial allocation at this juncture,” said Reddy.
From a portfolio perspective, Bajaj Allianz Life Insurance increased allocation to export-oriented sectors like IT, pharma and metals a while back to play on the rupee depreciation theme. This has relatively benefited its portfolio performance this year amid the correction, Reddy said.
In the financial space, Reddy is positive on private banks, as they continue to see pickup in credit growth and garner market share from their PSU counterparts. “The recent liquidity crunch in the NBFC space will additionally benefit private sector banks, and will add momentum to their credit off-take,” he felt.
“We may see a relative growth slowdown in the NBFC sector over the next year after the robust growth seen in past few years. However, well-capitalised NBFCs, which have good ALM and risk management in place, will come back to the healthy growth path soon,” he said.
ALM stands for asset-liability management.
Reddy said in the consumption space, valuations still look on the higher side. But he believes the sector will deliver returns from a long-term perspective.
On an overall basis, Reddy finds India seems relatively better positioned in the emerging market space, and it has managed to perform better than its peers this year. Some developed markets like the US have fared better, but India has still managed to do fairly well on a relative basis – considering the global risk aversion on account of trade wars in emerging markets, and the sharp drop in MSCI Emerging Markets index this year.