The ongoing disconnect between Dalal Street & Main Street is making everyone scratch their heads. The rise and rise of Sensex is gravity defying. To understand the risk reward matrix in the current environment, we had a quick chat with George Joseph. George is CIO & CEO with ITI Mutual Fund with more than 12 years of experience in stock picking and fund management. Prior to ITI, he has worked with ICICI Mutual Fund.

Here are the snippets of our discussion.

Sameer : Hi George ! What is your take on the equity markets at this juncture?

George : The continued rally on the bourses despite dismal economic data after the Covid-19 pandemic is widening the gap between index valuation and underlying fundamentals. Common sense has to prevail at this juncture, as liquidity driven rally has brought a belief to every market participant that all problems are over. We were expecting this rally to happen because of the massive quantum of liquidity pumped in by USA. However, we are now turning cautious from these levels. We see more downside to happen because of 3 major reasons:
1) Valuations have moved up quite a bit, markets are not cheap any more
2) Possibility of volatility rising in the next 4 months
3) Earnings to collapse much beyond our initial estimates as the lockdown got extended, COVID cases rising, Indian Government package not being effective and RBI measures are significantly short of expectations.

Sameer : Since you are cautious on markets, have you made any adjustments in the funds you manage?

George: We were very bullish and aggressive in our funds till second week of June’20. We have clearly mentioned in our factsheet commentary this month that we are turning cautious in our funds. Going more overweight on defensive stocks and reducing the equity level & financials exposure further has been done across funds.

Sameer: What is your view of COVID19 impact on India’s economy?

George: Indian economy’s road to recovery still has long way to go, as the lockdown got extended, the stress on businesses seems to be massive without any formidable support from the Govt or RBI, seen yet. The Nifty is up nearly 35 per cent from its March 2020 lows, even though the underlying index earnings per share continue to drift downwards due to the Covid-19 impact.  The nationwide lockdown impacted companies in the last seven days of the January-March 2020 quarter which is visible in the results across board.

Sameer: Impact on GDP would translate to impact on Corporate earnings. How serious that is likely to be?

George: The Nifty trailing 12-month earnings per share (EPS) works to be Rs 402 per unit of the index, down 10 per cent since March and the lowest since May last year. The decline in corporate earnings due to the Covid-19 lockdown has also wiped out the gains made from the income-tax cut, which came into effect from the October 2019 quarter. The Nifty EPS was Rs 410 before the tax cut, which increased to Rs 450 after that. We attribute the recent surge in the P/E multiple largely to benign liquidity in the market. The process has been fueled by ample liquidity in the market, thanks to unprecedented monetary expansion by major global central banks led by the US Federal Reserve.

At a broader level, the coronavirus has also wiped out most of the gains in corporate earnings made in the last six years. At present, the Nifty EPS is similar to that at the end of March 2014. At that time, the index EPS was Rs 408 per unit, which subsequently declined to around Rs 360 by October 2015 due to the fall in commodity and oil prices in 2014-15.

Sameer : What is your gut feeling about the expected market movement. Are we going to make new highs, or test the March lows, or is it going to be a range bound movement of Nifty50 ?

George: The scenario that we are expecting is markets can be highly volatile during next 4-5 months as US elections on Nov 2nd 2020, can create big volatility and probably significant fall in the market as well. Contrary to expectations, …lockdown in India is getting extended, …valuations are 50% up from lows, …economic contraction clearly visible, …most of the promoters are busy selling their stakes. All this suggests us to be cautious at this juncture. We believe protecting NAVs is more important than being adventurous at this stage. So, on a day when IT, Pharma, FMCG, Utilities and Cements don’t do well we may not perform and that has been the case since 18th June and this is exactly as per our expectations and want to be like that. Without pain there is no gain possible in the market. The party is going on, extending speculation which is seen in cash turnover doubling in 3 months from 40k crores to 87k crores. The retail participation going up significantly into direct equity (as most of the working class population is sitting at home and venturing into direct equities). Demat & Trading Account opening trend clearly suggests that whenever the market turns from current levels, it can be brutal.

Sameer: So, where would you invest your money in the trying times like these?

George: Today the best funds to invest are ITI BAF, ITI Multicap, ITI LTEF and ITI Small Cap in that order. ITI BAF and ITI Multicap are positioned very conservatively so you don’t need to worry about allocating even lumpsum amounts in these funds even on up days in the market. There are times we want to be aggressive in our funds, so in March’20 we were aggressive and we spread the message that a reflation rally can happen from April to July’20. We are very bullish on small caps from next 3-5 years perspective.

Sameer: Thanks George. We will catchup with you again !

Disclaimer: Nothing in this article should be construed as an investment advise by Fund Manager, AMC or Mutual Fund investments are subject to market risks, read all scheme related documents carefully


By Sameer Rastogi

18 years of experience, PG in Finance and has delivered Wealth Management lectures at IIM Lucknow, IBS Gurgaon and IIPM Delhi. Contributed to various newspapers. Strength – Application of Economic fundamentals to Investment

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