The coming decade can reward investors handsomely…
We are entering the last quarter of the decade that many are describing as the lost decade. Clearly, economic adversities outnumbered economic opportunities—especially in the emerging markets.
The last 10 years have been unyielding for equity investors.
Index returns are in single-digits in most cases and barring a few, mutual funds have also struggled to create wealth for their investors.
And despite the dream run the markets have been enjoying since the last week of March, the year 2020 will go in the history as the nadir of anticlimax.
But not everything’s lost.
We are perhaps going through a phase of creative destruction and there could be sunshine at the end of the tunnel, which many are suspecting is the light of an incoming train.
Survive, revive and thrive has been the mantra but where are we at present in this journey?
To gain further insights on this topic, we recently caught up with Mr Navneet Munot, CIO-SBI Mutual Fund. In a freewheeling conversation he touched upon a variety of topics such as the economic health, market outlook, SBI Mutual Fund’s philosophy and investment strategy under current market conditions, amongst others.
Below is the essence of our conversation with him.
When asked about the primary reasons for the underperformance of equity assets, he not only described the structural issues but also remarked on what could go right from here onwards.
At the beginning of the decade, the world economy was emerging from the shocks of a global financial crisis. Synchronized global policy decisions uplifted economic growth and boosted business confidence. However, this new found optimism resulted in complacencies which later culminated into a bad business cycle. India had its share of problems—high inflation, high current account deficit and high fiscal deficit, to name a few.
Before coronavirus pandemic rocked the world, major economies took tough policy decisions; be they related to monetary policy, the regulatory environment or bi-lateral and multi-lateral trade relations. Excessive tightening and a tough stance on the policy front chocked global growth. The wave of formalization proved counterproductive for India in the initial phase.
Towards the end of 2019, many believed that India was at an inflection point and was ready to start a new growth cycle, albeit on a cautious note. But the ongoing pandemic seems to have thrown a spanner in the works.
The tremors of the on-going pandemic may be felt for the next few quarters but the Indian economy might be in a sweet spot on the other side of the pandemic.
Unlike many others experts, Navneet Munot believed that the shape of the economic recovery could resemble the alphabet K and not V, W, S or L—meaning growth trends can’t be generalized. He described the present economic situation, stating, ”We are living in the world where certainty is continuity of uncertainty.” He also opined that companies that will survive this pandemic will revive and thrive in the post pandemic world.
Some sections of the economy might do well and contribute positively to demand creation while others might struggle. For instance, people working in industries that are relatively unaffected by the pandemic and those who haven’t faced pay-cuts are likely to be less impacted than those who have lost their jobs or have faced salary-cuts. In fact, they may have enjoyed higher net savings as there was less scope for discretionary spending during the lockdowns. These savings could either flow towards investment or consumption.
He didn’t find much merit in commenting on the growth vs value debate because according to him, even while picking a growth stock an investor looks at the value it offers.
While he felt creation of infrastructure—physical, digital, medical and social may gather pace in the coming times, he also cautioned about not getting swayed by the attractive macro-themes. To make his case more concrete he gave example of the Y2K era. Technology changed many lives between 2000 and 2010 but the stock market performance of many technology stocks was mediocre compared to their millennium high. So was the case with telecom companies in the post-financial crisis times.
When asked about market valuations, he recited George Soros’ Theory of Reflexivity, which in essence claims that investors’ decisions don’t really stem from reality rather they are based on the perception of reality. He ventured that while fundamentals typically impact market prices, the reverse impact could also possibly play out. That being so, the current valuations may turn into self-fulfilling prophecies.
He appeared upbeat on Indian markets as he spotted three similarities between the present times and those at the turn of the millennium, which were a precursor to a healthy bull run. They are as follows:
Strong policy response to decelerating economic prospects
And a broader investment theme which acts as a sentiment booster
We have witnessed all three factors playing out in the last 6 months—markets nosedived in March and bounced back sharply during lockdowns and beyond. India’s largest telecom operator diluting its stake at meaty valuations was a sentiment booster—perception of reality. He stated that when markets disappointed investors with poor returns on a 10-year timeframe, the next 10-years have tended to be rewarding, historically.
Shedding light on the stock selection process, Mr Munot unveiled the 5-R strategy of the fund house.
Typically, the fund house invests in companies that:
Focus on risk management
Are serious about R&D and innovation
Take re-skilling of their employees seriously
Value relationships with all stakeholders—minority shareholders, suppliers, stockiest, employees
Performance of SBI funds at glance
Data as on September 14, 2020
(Source: ACE MF)
To caution investors, Mr Munot also drew attention to the point that markets might be already factoring in a lot of positives such as, the economy recovering gradually, corporate profits bottoming out in Q1FY21, government taking measures to prop up economic growth and so on. He didn’t rule out the possibility of markets witnessing a phase of consolidation, if some of the expected outcomes fail to meet investors’ expectations.
In a nutshell…
Don’t get enamoured by the macro stories. Focus on company fundamentals, keeping the 5-R strategy in mind—the secret sauce of investor success! If you don’t have adequate time to do thorough research on your own, you might like to take professional help.
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We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
Consult your financial advisor before taking any investment decision.
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflicts of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.