How To Manage Your Money Amid COVID 19 Corrections | CEO Interview | Axis Mutual Funds

Since the outbreak of the novel coronavirus, we have seen the markets going down by about 30 percent, gains wiping out from our portfolios, liquidity crisis, and a fund house wrapping up a few of their debt-focused funds. All these in merely two months time. And it’s not over yet. With a fear of recession coming, the situation might get even worse.

With too many things happening at the same time, investors are confused, should they invest or stay put? If staying invested is the right approach, then where to invest?

To bring solution to such a dilemma, Mr. Chandresh Nigam, MD and CEO, Axis Mutual Fund at the ‘Ask the Expert Session’ said instead of looking at negatives, one should take advantage of the opportune moment to buy good quality funds.

Only four months back, the market touched an all time high, and then we saw the biggest drop in the last 10 years. Now everybody is wondering, as far as the markets are concerned, is the worst behind us, or is there still more pain that you expect in the coming future?

Nigam: Yes, only a while ago, things were going reasonably well. Though the economy was not doing that well, the markets were doing tremendously well. But the expectation was that the economy would catch up with the market. And, what happened in the last two or three months changed everything that we have seen in the past. Now coming back to your question, whatever has happened is unprecedented. It came and hit us out of the blue. It was a black swan kind of an event. And from that perspective, the markets obviously reacted to it. And, I think, it is important to understand that the extent of the drop is quite severe. There are two reasons for that. One, obviously people understood, while there was significant uncertainty, it was clear that short term economic activity would be very badly hit. That was one part of it.

Equally important part was the technical position of the market. Globally with all asset markets going down and many investors globally having leveraged portfolios, they had to meet cash calls. There was an across the board and across all asset classes selling happening. So when the market falls in an orderly fashion, you can understand that people are taking a call that they want to get out. When you suddenly see indices falling by 20 percent, you know it is more of a technical condition. So, as it is a technical condition and we do not exactly know whether it is completely unwound or not. But, one would expect that in the last two or three months, it would have been significantly unwound. So from a technical perspective, I believe, the worst is over.

Now the question is what is happening on the fundamental side. The view is that the market will move ahead of the economic recovery. I for once believe that the economy will recover over a 12 to 18 month perspective. Shorter term is still quite uncertain. That’s what the daily volatility in the market is all about. We are guessing when the lockdown will get over, things will improve. Part of it is when the economy will start and how much time it will take to get back to business. And part of it is also dependent on what is the medical solution to the health crisis we are currently seeing. Assuming that all that gets done in the next 12 months, the markets will recover a lot faster than the economy. The economy will take a significant amount of time to get back to the pre-COVID levels. And one thing which is in favour of markets. Once that visibility comes that we will be past this problem, there is an unprecedented amount of liquidity in the market. Once that clarity comes in that there is a medical solution and things are not getting any worse, and the markets all over the world are showing that. After we had that big drop, the market did really come back. I think, in anticipation and expectation that the worst is probably behind us and the things would be better.

Now unfortunately if the things workout the other way, we believe there would be more volatility. But, as things stand today, I would be betting on, over the next six to 12 months there will be a reasonable rally in anticipation that in 12 months from now, the economic conditions will be much better and we would be past the health crisis.

As you have mentioned that in 12 to 18 months we will get some visibility, but for investors there is a lot of confusion about how they should approach investing in this intervening period. The prediction is that the GDP will fall, it will grow at only 2 percent. Then there is a fear of recession coming in. So what should investors be doing. Should they be doing things differently in the next 12 to 18 months, or should they stick to what they have been doing?

Nigam: There are two parts to it. When I say 12 to 18 months, I mean what is happening outside. That is what my expectation is based on what the medical fraternity is telling us that by that time the vaccine will be out. Hopefully that could be earlier, I do not know that.

Second issue is that the bad news is coming on a day-to-day basis. I think there is a slight improvement to that. But as there is a massive level shutdown and the GDP will fall, the government will have to intervene and fiscal deficit etc. I think a large part of it has already been discounted by the markets. And that’s where we will have to understand that the market is certainly not looking at the next six months for that matter financial year 20–21. The market is looking certainly beyond that. Maybe business will have a significant loss in this quarter. Many businesses do not have any sales, dealership, trade virtually shut down and you are not in the nature of essential goods so your factories are shut down. I do not think the market will be too surprised if it starts to see red on these companies’ financial and balance sheets. The market is going to look and estimate whether a particular company will be able to rebound or how well it will rebound once things normalise. Will it be able to maintain its competitiveness, strength and position in the industry. We do believe that not every company will be able to make safe and sound on the other side of this crisis. There might be some companies who might have to unfortunately shut shop or operate in a manner which can never take them to their earlier highs.

Now coming to the third part of the question: what should the investors do? Investors have to be patient. We have a tendency to get swayed by daily sentiments whatever we come to hear that such and such companies are in deep losses and there are job losses. But I think selling or staying away from investing because the short term returns are not good, is not the correct approach. But unfortunately, the people do react that way. The best thing to do at this point is to try and reach your targeted asset allocation slowly. I am sure after the fall in the market, for most people, at least for those who were at their asset allocations already must be much lower than their targeted asset allocations. There is no urgency to kind of reset it on day one or within a few days. I think in the next two or three months as we get more data, like what is the update on the medical front and what has been the experiences of the countries which are opening up, (for example Europe is going to open up in a month or so, in fact there are reports that their schools might also be opening) and if their experiences are good and there is no more rising number of cases, then I think the markets will slowly start to understand and react to it.

Our problem in India might be a little longer as the kind of strain our medical system can take is probably a lot lower, so we will have to do it in a much more calibrated manner. But at least the end point would be reasonably clear, looking at the experiences at some of the other markets. So stick to your allocation, if you are not at your allocation then slowly correct it. In my experience in the last so many years, that strategy certainly works.

One asset class that has been doing extremely well now is gold. And there is so much investor interest now that many of them are thinking about investing in gold. Should investors be investing in gold now? What role does it play in investors’ portfolios? And how much is enough in your portfolio?

Nigam: Again the answer is asset allocation. We have been strong votaries of 5 to 7 percent of gold in a portfolio. Now many households in India, because historically they have always been interested in gold, so probably it’s already there. But if it’s not there then it is not a very bad idea to be there in financial gold.

Now coming to the role, the role is not about generating return but providing insurance. If there is a real crisis, (here I am talking about the crisis of paper currencies, because all central banks are printing a lot of money, and the balance sheets of central banks are moving up) I do not foresee the situation right now, but it is not about whether I see it for next six months or 12 months, but in case if people lose confidence in paper currencies and in case there is an inflation (however, right now there is a worry about deflation so we do not have to think about it too much), I think it is not a bad idea to invest in gold in an long term perspective as an insurance. If the gold prices go down, we should not feel bad that it went down when I invested in it. As I think the other asset classes which are the other 95 percent of your portfolio are there to give you returns. This is basically insurance.

If something really bad were to happen in the world economy etc, then this is the asset class for survival and that is because there is so little of it. If the total market cap of gold is x, then the total financial market is probably 100x. So if there is something happening in the 100x, and this is the one of the asset classes doing well, then we should see a sharp move in that and it will help hedge the overall portfolio. But then again, I do not think we should be falling for that kind of a scenario. But as we always recommend people to buy insurance, this is some kind of an insurance for your financial portfolio.

So you are saying 10 percent of gold and then use it as an insurance.

Nigam: About 10 percent is too much, as a share of 5 to 7 percent is enough.

Another point that you have mentioned is that some companies might be forced to shut shop or may have to change the way they have been operating, it might be indicating to small and mid cap space. A few months back, small and mid cap valuation started looking reasonable and there were calls that it was the right time to invest in this space. Now, COVID-19 has completely changed that scenario, now does the space look as attractive as it looked two to three months ago? Or is it better to stay away considering the reality that we have in the post COVID 19 world?

Nigam: At Axis, we never talk about businesses from the view of large, mid or small. We talk about sustainable high-quality businesses. Then there are not so good and then there are the ones that are completely unpredictable and may not be strong to sustain their shops. These kinds of companies exist in all kinds of the market caps. They are in large, mid and small as well. Just by the sheer size of small caps. I mean, if you look at the numbers of small caps, I mean if you look at 300 companies as large and caps, then there are 1,500 small cap businesses. Obviously many of them would be fairly weak. Wherever we see sustainability, we as a fund house look at all the three sectors, to look for sustainable businesses which will ride the downturn well and will continue to grow with may be some hiccups in 2020–21, but 2021–22 onwards they will do well. So I think you should be there and the valuations have come up in the last couple of months. So if you have the appetite of the risk, not linked to the company risk but more linked to the market risk, because the small caps are a lot more volatile, so in one quarter if it does not do good, its stocks can really take a beating. For large caps, the markets are a little more forgiving. Now coming back to the question of what an investor should do, I think the environment is, there is no immediate need because they have suddenly started looking much cheaper than large cap to go and buy it.

From the investors perspective, I certainly believe that 70 to 80 percent of the money should be invested in steady large and mid cap quality names. Once you have taken that risk in your portfolio and still want more to exploit opportunities in the small cap space, then you can add maybe another 10 percent percent to the portfolio. But bulk of the possession has to be in high quality names for a retail investor, or maybe in the multi cap.

There is a belief in the market that when the recovery happens, large caps will lead the recovery. In fact, we are seeing some kind of movement happening in the large cap space in the last couple of weeks. Many investors are thinking of junking small and mid caps and moving to large caps. What are your views on this?

Nigam: If you have already built a portfolio of large, mid and small caps and you believe you are in good companies, I don’t think there is any need to change. I think this is because of the speculations that something will go up early, and something will go up late, that will certainly happen sometime. It may happen sometime that mid cap will do well first, the large cap will follow. This time, the large caps will do well. But I think the markets are reasonably researched and there is enough interest across the book. There is enough money in the mid caps and in the small caps group. Everybody is going to look at the markets as the sentiments change. Something goes ahead one week, and two weeks ahead it is going to make much of a difference.

Coming to why this market has seen such a significant fall is because of the sell from foreign investors. Actually local investors have still been investing in the last two months if you see the data. And I think this market will secularly go up once we see the resumptions of the flows from FIIs. Typically, the foreign investors will buy large caps first. I don’t think no one initially buys small caps. It’s when the sentiment changes and more the local investors start to feel confident, that is when mid and small caps will go up. But it will go up. So if you have already done the hard work and already found the right portfolio with high quality businesses, I don’t think just because large caps might go up two weeks before the small caps, you should sell to jump at large caps. I have not found a trader who would do that. I think, if you have a good portfolio, you have already taken the hits and the losses, and you are confident that these companies will do well in the next two to three years, you should stick to it.

Now coming to debt, there is a lot of panic amongst the investors after what happened in the last few days. How do you see this, was it a problem very unique to a particular fund house or do you see a broader liquidity challenge faced by the debt funds for the next 6 to 18 months? And what should investors looking at investing in debt funds should be doing?

A credit cycle is basically about saying the number of upgrades versus the number of downgrades. Obviously, in such an environment where businesses are facing massive problems where there is virtually no sales, you will see downgrades happening. This is not good for what are called credit funds, that is where I think the root of the problem is. Having said that, ultimately you have to start to look at the fund house, or the portfolio or scheme of the said fund house, i.e. how much leveraged or what is the quality of that bond? I think from an overall industry perspective, while there is much of a liquidity issue, there is not much of a credit issue. The businesses which are being owned, also probably true for the fund house which you have been mentioning — there may be some downgrades, or stress, but the overall portfolios are of pretty good quality. Today, just because there is a liquidity crisis, people feel my money is stuck. But it is not the same as my money is lost. The money is not lost. Over a period of time, as this liquidity situation abates, you have already heard that RBI has given a Rs 50,000 crore line, right now there is a panic and it will take a few weeks to settle down. And after that, notwithstanding what I have said about credit funds, yes there has certainly been a deterioration, there will be further deterioration in the market but that has already been priced in the market. That said about equity funds, the worst is already priced in, however, more than the worst has already been priced in for the debt funds, i.e., the price at which these bonds are now traded or valued at the market. And again there is no need to get out. Again you asset allocation as it is, people would not want to increase exposure to credit funds in this deteriorating credit environment, though there might be some great bargains available.

So if you want to play it safe, play it safe with AAA or AAA and AA mixes. That is in the ultra-short term and the short term space, which is basically maturity upto three years kind of a space. These funds for the last 15 to 20 years have really done well for the investors, and yes there is volatility but you have to park your money somewhere. And I think this is a very good opportunity even for a low risk investor.

Though there is a lot of gloom in the market, due to the correction, what are the positives that you see coming out of this correction over the medium to long term?

Nigam: On the equity side it is very clear, for great quality companies, before this correction, there were some worries, it was in everybody’s mind that what about valuation? Now, the valuations have really corrected and it is an opportunity to buy great companies with a three, five or even 10 years perspective at much lower price. From the investors perspective, I will look at it as a great opportunity. I know it is difficult to look at the opportunity when you are fearful and you are hearing negative news like lockdown opening in some areas and extending in others areas, then there is low GDP growth etc. These are negative. But eventually, everytime, the markets climb the wall of worry . As the equity market becomes more sophisticated, which happens over a period of time, investors start to look at the longer term picture. And the future looks fairly good. Obviously, there is no 100 percent consensus to that picture. This is because if everyone agrees to my thinking that in 12 months down the line everything will start looking normal, may be in a different way but will be much better. And obviously, it will be much higher than what it is today. Some people are willing to look at the long term, and there are some who are speculating what the short term is. But such situations create opportunities.

The second is, I think, is a more structural thing. Various sectors if you look at great companies over a long period of time, increase their market shares, in terms of revenue or profit share or profit pool of the entire industry. This exercise takes time, you have one cycle which is probably three or four years, then good quality companies outperform and the weaker ones become smaller. If you are a quality investor, you will be a gainer in a relatively short period of time, as the companies you own or some of the stronger companies will gain market share at the expense of the others. So maybe once things turn around, you might get to see probably higher market share or growth in some companies. We have seen this some three years ago, when demonitisation happened, there was significant increase in market share for few companies while the overall market did not grow that well.

Third, is the huge amount of liquidity which is already there in the market. Once we get past all this, there is enough fuel to fire a strong rally.

Axis mutual funds have come out with flying colours amongst all the funds. We wanted to know how you were able to protect the downside and is there a change in your approach towards investing looking at the conditions, or you have been continuing with the philosophy that you have been doing for so many years?

The philosophy is too much ingrained in us to be changing that. And we have done well both on the upside, when the markets were doing really well, and also we have been able to protect the downside. The answer is two-fold. 70 percent of the credit goes to our philosophy of investing in sustainable high growth companies. They typically do well when there is an upcycle in the economy, and during the downcycle they do better than their peers and competitions.

And the second part of the question is, what will you change? As such we are not changing anything and we are focused on a limited number of high quality companies that allows us to do a very good job by helping us to understand where these companies are, how they are likely to react or respond or get affected by whatever is happening in the overall economy because of COVID. Just being very close to these companies and tracking them very closely that has helped us to restructure our portfolios. Some of the sectors where we were largely overweight, thinking that it might get tougher for that, we have been able to cut exposure. So just saying you are invested in high quality companies does not help if you do not keep tracking them regularly. Some of which are still great four-five year stories, they continue to hold on to them. In fact, since the prices have come down, we have increased our allocations. For some companies, for whom the next one to two years look fairly weak, there we have reduced exposure or even did exit. I think both. The overall top down risk control, that is saying that we will be in high-quality businesses. And bottom-up individual risk assessments. You can really do these things, if you are really close to these companies.

If the analysts and the fund managers really understand what the business is all about. I think focusing on both these things has really helped us

Originally published at https://www.etmoney.com.