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We have not had any panic redemption in recent weeks: Mirae Asset

GAURAV MISRA, senior fund manager at Mirae Asset Investment Managers
The recent troubles at Franklin Templeton took investors by surprise and saw the Reserve Bank of India (RBI) step in with liquidity support measures. GAURAV MISRA, senior fund manager at Mirae Asset Investment Managers tells Puneet Wadhwa that investors are not panicking in aggregate. There is an understanding that volatility is inherent to the asset class, timing is tricky and that in this case volatility has been completely driven by an outside event, he says. Edited excerpts:

Markets have seen a sharp pullback since the March low. Is the recovery sustainable?

Typically after such a sharp pull back, there might be a period of consolidation. The markets will have a keen eye on how the Covid-19 pandemic is evolving. If there are enough signals that the pandemic is still running amok, then the recovery will take a deeper, longer and more volatile pause.

The Reserve Bank of India announced Rs 50,000 crore window for mutual funds on Monday. Are you, too, facing redemption pressure in any of your schemes?

For us, net inflows into equity have continued in March and April within the range of inflows seen in the trailing 12 months. At the portfolio level, we do not take cash calls and typically have up to 2 – 3 per cent cash levels in any portfolio. We have not had any panic redemptions/outflows across both equity and debt funds in recent weeks as well.

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Can you elaborate on your stance on the financial sector?

Financials, in aggregate, had better liquidity and capital adequacy going into the pandemic than in earlier crisis. They have also emerged from a prolonged period of asset quality cleansing. That said, every crisis is different. This time around the duration of the lockdown (and its impact on weaker businesses) and consumer behaviour with respect to the RBI granted moratorium will have a bearing. The underlying economic situation is very fluid but some parts such as the rural economy should hold up well. Select companies will be able to mitigate the ongoing stress with better cost control, lower cost of funds and astute growth.

So, it’s a good time to take exposure in financials given their fall from peak?

Valuations in the banking space have become attractive after the sharp correction. However, investors have to be prepared for dealing with volatility and maybe even a period of prolonged uncertainty. The recent correction presents an opportunity to look at some of the better names very constructively. There is not only a structural story but also an opportunity to participate through good and well managed businesses, some which could emerge even stronger on the other side.

What’s your investment strategy now?

For the long term – depending on investor risk profile, a blend of large, multi-cap and large/midcap schemes is appropriate in my view. Small-caps may be looked more tactically at a later point when there is greater visibility and certainty on broad based economic growth. As an asset management company (AMC) we would recommend 70 per cent in large-cap, multi-cap, hybrid funds and remaining 30 per cent in mid-and small-caps and sector funds.

Our approach to selecting businesses and our investment strategy has remained unchanged. We are looking for good quality businesses, run by good managements, typically addressing structural growth opportunities at the best available margin of safety. Additionally, at the portfolio level, we keep space for some businesses which might be deep in value on account of myriad factors – cyclicality, turnaround, industry consolidation, etc.

In the recent past, we have used the market volatility to add some quality franchises and replaced our weakest holdings. Overweight healthcare (including pharma), insurance, automobiles/consumer discretionary and utilities. We are underweight metals and consumer staples.

How is the mood among your clients as regards equities as an asset class?

Clients are not panicking in aggregate. There is an understanding that volatility is inherent to the asset class, timing is tricky and that in this case volatility has been completely driven by an outside event. We have seen a mature reaction from investors, compared to previous market volatility events like in 2000 and 2008.

Is it a good strategy to allocate money pharma and telecom as safe haven plays?

I would look to invest/remain invested in pharma. The telecom sector is emerging from a period of intense competition to one which will eventually lead to improving returns on the invested capital. However, the sector dynamics are still evolving. Issues with the Department of Telecom (DoT) and the Supreme Court (SC) ruling on the same have created lingering uncertainty on the final industry structure. Additionally, there will be another dose of investments required to migrate to 5G technology. I will watch these from the side lines.

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The pharma sector, on the other hand, will present investment opportunities from a stock specific bottom-up approach. The sector, especially the formulation manufacturers, are witnessing a favourable tailwind from the US. Pricing pressures are expected to abate and on account of real/anticipated shortages the US FDA has been fast tracking product approvals. The Indian pharma industry was already at the forefront of global generics on cost and quality parameters. The sector has other business models ranging from contract research service providers to healthcare service providers. Each sub-segment and business has to be looked at individually – depending of the product mix, geographic salience and product pipelines.

If the markets were to inch higher over the next 6 – 12 months, which sectors / stocks do you think investors will chase?

The color of any initial rally will depend on the nature of inflows. If it is predominantly ETF money, then index heavyweight stocks will rally first. Typically in the initial stages, we see defensives like consumer staples and pharma doing well and this is already playing out. Over a 6-12 month period, assuming the pandemic is behind us, strong and well-run business models across many industries will do well. This would be true of leading and niche firms in the banking finance and insurance (BFSI), automobiles, agri, consumer discretionary – white goods, electricals, homebuilding/paints, jewellery and even within the information technology (IT) segment.  Over such a period of normalisation, pent up demand across these industries would have materialised and weaker/unorganised firms would have ceded market share to the stronger ones. 

Will the market leadership change?

A leadership change, sectorally speaking, is not a given. It will depend on whether and by how much underlying fundamentals of each sector has changed in this period. For example, trends such as online payments and e commerce were already underway. On the other hand, the need for social distancing and greater hygiene/health awareness could lead to demand for more individualized transport and packaged staple food consumption.

The primary cause of this downturn has been a pandemic – Covid 19. It is a health problem but on account of which, the real economy and consumer behaviour has been frozen/disrupted in major parts. Depending on how much the opening is delayed, disruptions caused in the interim and the nature of revival, will have a bearing on where from new sector leadership, if any, emerges. Lastly, even within an industry, leadership can change after such a tumultuous period. This will be driven more by the leadership of individual management teams and the strategic choices they make.

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