Share market volatility on cards; use correction for lumpsum investment in these sectors | Interview

Indian stock market witnessed a healthy recovery from March lows on the back of strong global liquidity, economic indicators and better than expected Q1 FY21 earnings, said Reshma Banda, Head–Equity & Senior Vice President, Investments, Bajaj Allianz Life. In an interview with Surbhi Jain of Financial Express Online, Banda says that there is a possibility of some volatility or muted returns in the short-term going ahead. Banda sees the IT sector as better placed in the current environment as due to coronavirus-led work from home culture, the IT sector has not been negatively impacted so far. She also advises investors to continue to systematically invest in equities. With the short-term market volatility in the offing, Banda advises investors to use any large market dips/corrections for lumpsum investments.

1. When do you see the possibility of recovery in the Indian stock markets? What would be the road ahead for investors in future?

Indian stock markets have seen a healthy recovery from the March 2020 lows. The recovery has been aided by strong global liquidity (fuelled by massive monetary & fiscal stimulus announced globally), healthy recovery in various high-frequency economic indicators, better than expected Q1 FY21 earnings and estimated recovery in corporate earnings in FY22, and improved prospects of a Covid-19 vaccine in the new future.

In the short term, there is a possibility that we may see some volatility or muted returns. But over the long term, we expect the structural growth story for Indian markets to continue, and for them to deliver healthy returns. Some factors to look out for include the trajectory of COVID cases globally (some European countries have been witnessing signs of a second wave lately) and in India (where some moderation in active/new cases has been seen lately), rise in geopolitical tensions–which could impact global risk appetite & flows, any change in global monetary policy stance, and the progress on the COVID vaccine.

2. Ahead of the festive season, where do you see the opportunity within the FMCG sector?

Earnings for the FMCG sector are expected to be reasonably strong, though the valuations for the sector are elevated. Rural consumption has been quite strong and has been relatively insulated from the pandemic. Urban consumption has also recovered with the economy opening-up, and the momentum could gather pace–fuelled by the festive season.

3. What are your overweight and underweight sectors? With the vaccines trials all around the world, where do you see the pharma sector in the next 6 months from now?

We are overweight in the defensive sectors of pharmaceuticals & IT. Pharma sector has come out of a long down cycle–led by easing of pricing pressure for generics in the US market and improvement on supply-related issues with most of the US FDA related issues being behind us. The ongoing COVID related health crisis and improvement in the profitability of the domestic pharmaceutical market has contributed to the attractiveness of the sector. IT sector is better placed in the current environment, given the cash-rich balance sheet, high RoE and attractive valuation multiples. With the work from home environment and demand remaining strong, this sector has not been negatively impacted due to the COVID pandemic.

We are underweight on some of the cyclical sectors like capital goods and financials, due to significant growth slowdown that we have seen in India. The financial sector has seen a slowdown in credit growth, and there are concerns on asset quality and with a rise in credit costs. We remain more optimistic on private banks which are better placed to gain market share under conditions of economic stress as they are better capitalized. For the capital goods sector, there are signs of green shoots in the economy but there are also fiscal challenges—which may limit government spending to an extent. Capacity utilization is at sub-optimal levels, and we would expect private sector capex to pick up when the recovery in economic growth becomes more pronounced.

4. How has been Indian share market performance vis a vis global markets?

After the market correction, for FYTD 21 (April – September 2020), India has been among the top-performing major global markets. After one of the swiftest corrections that we have seen in February – March 2020, we have also seen one of the swiftest recoveries—with the Indian markets recovering most of their earlier losses. On a CYTD 20 basis (January to September 2020), India has been a mid-tier performer, with certain other markets like China, South Korea, Taiwan, US, and Japan outperforming over the period.

This recovery has primarily been helped by strong FII equity flows, although we saw some outflow in the month of September. India has received one of the highest foreign inflows in CYTD 20 among peer emerging (EM) Asian markets, most of which have seen net outflows over the same period. Also, India has one of the highest overweight positions (relative to benchmark index) in portfolios of global emerging market funds and in Asia ex-Japan equity funds.

5. What would you advise first time stock market investors? Which themes look attractive right now?

We advise long term investors to continue to systematically invest in equities. We may see some short-term market volatility, and investors can use any large market dips/corrections for lumpsum investments. Historical data (including the recent COVID related market correction in 2020) has shown that investments made in challenging times can be quite rewarding for investors over the medium to long term.

From a sectoral perspective, we prefer some of the defensive themes as mentioned earlier. From a market-cap perspective, we prefer the large-cap segment and advise higher allocation to the same. Macro fundamentals still remain a bit challenged and therefore large caps may see relatively less volatility compared to mid/small caps, and better placed from a risk-reward perspective at this juncture.

6. Why is it important to have ULIPs in investment portfolios?

ULIPs typically have a longer-term orientation (5 year lock-in period), and help investors in achieving their medium to long term financial goals, besides also providing life insurance cover. ULIPs have various tax advantages (due to their long-term nature), and regulations have also made the cost (expense ratio) of new-age ULIPs quite competitive.

Under Section 10(10)D of the Income-tax act, 1971, the maturity proceeds or sum assured of an insurance policy is tax-free, provided the sum assured is 10X (or more) of the annual premium. Also, you can get exemption up to Rs. 1.5 lakhs under section 80C of the IT act. Another unique advantage of a new-age ULIP is that within the product, the investor can switch between various funds option (equity, debt, liquid fund etc.) without any capital gains tax incidence and can switch as many times–without any additional charges or any exit load. This helps an investor to plan their asset allocation in a more efficient and tax-friendly manner, depending on market conditions and outlook.

Therefore, the above mentioned tax advantages, along with lower expenses of new-age ULIPs, helps in higher ‘net return’ (net of expenses & taxes) in the hands of the investor.

7. What change do you notice in the stock market sentiment for both domestic and global, in lieu of vaccine arrivals?

The arrival of the vaccine will accelerate the economic recovery by allowing greater opening up of the economy, and therefore a return to normalization. However, it needs to be kept in mind that the distribution of the vaccine among the masses will also take some time, from the time of arrival. Markets are forward-looking in nature, so they will tend to discount the vaccine arrival in advance and move up in anticipation accordingly.

8. Which one is a bigger risk for equity markets globally – a trade war between US and China, or the outcome of the US Presidential elections?

We will need to see if there is any change in policy initiatives under the new or existing US government, after the elections. There is uncertainty on certain factors regarding the US elections, and these will need to be monitored — like what will be the policy action, if trade pacts, especially with China, see any change (in terms of escalation/de-escalation), if there are changes to fiscal stimulus and other economic packages and tax reforms under the new/existing regime.