The best time to invest in equities is when the economy is not doing well

BFSI Industry Interview
On: Mar 24, 2020 | From: Advisorkhoj Team
BFSI Industry Interview in Advisorkhoj - The best time to invest in equities is when the economy is not doing well

Mr. George Heber Joseph joined ITI Asset Management Ltd. in November, 2018 and is responsible for the entire business of ITI Asset Management Ltd.

George has around two decades of experience and has held positions in Equity Research, Fund Management, Treasury Management and Management Consulting. Prior to joining ITI Asset Management Ltd., he has worked in companies like ICICI Prudential Asset Management Ltd., Tanfac Industries Ltd. (Aditya Birla Group), Cholamandalam Investments & Finance Co. Ltd., Met Life India, Wipro and DSP Merrill Lynch Ltd. based in India and abroad.

His last stint was at ICICI Prudential Asset Management Co. Ltd. Mumbai, where he spent more than a decade managing some of the large flagship fund strategies in the equity and hybrid categories with assets under management exceeding Rs. 10,000 crores. All funds (Multicap, ELSS – Long Term Equity Fund, Child Care) and discretionary portfolios (Wellness, Exports, Flexicap, Largecap, PIPE/Smallcap) managed by him during this entire period were excellent performers in their respective categories. There, he was designated as Senior Fund Manager (Vice President Grade) based in Mumbai, India and was one of the Key Management Personnel in the company and was part of the investment management team.

He is known for his focus on extensive bottom-up research and stock picking capabilities, has overseen fund managers activities, managed various research analysts during his tenure.

George holds dual Bachelor’s Degrees in English Language & Literature and Commerce. He is a qualified Chartered Accountant from Institute of Chartered Accountants of India, New Delhi and a Cost and Management Accountant from Institute of Cost Accountants of India, Kolkata.

The last 2 months have been horrendous for the stock market with Nifty falling 25%. Nifty was trading at tailing PE multiple of 28X on 1st January and now it as at 21X. What are your views on current large cap valuations? Are they attractive now from a purely fundamental perspective?

We have been highlighting in our factsheets that we are at the bottom of the economic cycle. Corporate Profitability to GDP is at 2.6% which is almost the same as the Year 2003. When earnings are depressed in most of the sectors P/E ratio will look high and that doesn’t mean that the market is expensive. Price to Book Value is a good metric to look at, to understand the overall valuation scenario. Post the massive correction in Nifty50 Index, trailing Price to Book Value is at 1.87x and in October 2008 the trailing Price to Book Value of Nifty50 was 1.89x. So Large Caps are below 2008 bottom valuations and the similar cheapness is visible in midcaps and small cap segment of stocks also. Post the Corona Virus scare, our economy will pick up from the low base, pent-up demand also will be robust, ROEs will improve and Capex cycle also will kick start. So, from a fundamental perspective on an overall, a good time to be positive on Equities. Large Cap segment provides a good margin of safety to buy into big businesses and most of the businesses are at cyclical bottom growth and valuations which are bound to see significant recovery in years to come.

The spread of Coronavirus is limited in India so far compared to many other markets and the Central / State Governments are taking pro-active steps to contain the spread of the contagion. Data coming from China indicate severe impact on their economic / industrial activity since the outbreak of the disease. What is your assessment of the impact of the Coronavirus on India’s real economy based on whatever information we have now?

A recession caused by Corona virus is unlikely to damage the economic infrastructure or corporate balance sheets in a very significant manner. China has shown the world that the impact of the epidemic can be contained over a relatively short period of time. Post containment of the epidemic, economic activity will recover to pre-Corona levels within a short period of time and corporate earnings too would recover. Market has corrected by 30% already which means market is already pricing in 2 years of zero growth. We believe the issues and media headlines will change 3-6 months from now. Therefore, we view this correction in markets as an excellent buying opportunity with a 3-5 years view. Potentially markets can give excellent returns when things normalise.

We believe the corona virus impact could be a 3 months window problem and the recovery of all businesses will take another one more quarter. I hope the problem in India doesn’t escalate further as the summer has set in and we have a relatively younger population. Sensex has corrected almost 40% which means market is thinking almost 3-4 years earnings growth in Nifty would be almost zero. I don’t see any reason to be so pessimistic at this point of time. China is the manufacturing hub for the entire world, when the corona virus impact happened global supply chain got into a logjam but China is recovering faster. In India the economy would impact for a quarter or two and then will recoup fast. Low Crude Oil Price, Low interest rates, Government lead incentives, rural development programs and significant Government capex can change the direction of our economy and can be one of the best performers in the entire emerging markets.

While Coronavirus has been dominating headlines for the past few weeks, the other major concern for Indian equity investors is the banking sector. What are your views on the banking sector, including the steps taken by RBI / Government?

Banking sector is a leveraged sector, whenever an economic impact is expected there could be a massive sell-off in the banking sector. FIIs are also owning the sector in a big way, if there is a big sell off in the market, then banking sector faces the brunt. We believe that significant sector weightage Banking and Financials have in Nifty50 or other diversified equity fund indices are quite high. Weightages of the sectors are highly cyclical and my belief is that banking sector weightages are bound to correct over next 10 years. Actions taken by RBI is decent and is helping to create more liquidity in the system. This is very important for the stability of the banking system and also for the markets.

Many large cap funds have struggled to beat Sensex or Nifty TRI over the past couple of years. How will the investment strategy for your large cap fund create alphas for investors?

Last 10 years the Nifty returns came mainly from few sectors and stocks linked to B2C businesses. Some of the high weighted benchmark stocks in oil & gas sector has moved up after a 10 year stagnation and this has created negative alpha for most of the fund managers in India. We have a clear focus on generating stock selection alpha in this fund so sector deviations are limited to +/-5% of the Benchmark Index weight. The fund will not have more than 40 stocks and will not buy mid or small caps in this fund. Our bottom up research will provide us the strong ideas to bet on and that will create Signiant alpha in the fund.

Why is this a good time to invest in large caps? While SIP is a good investment option for investors to invest in large caps, for investors who have lump sum funds, is this a good time to invest in lump sum given that Nifty valuation is significantly lower than higher end of the historical valuation range? What is your advice to investors?

Best time to invest in Large Caps is when your risk appetite is low and less volatility is to be seen over the investment period. The best time to invest in equities is when the economy is not doing well, there is a possibility of growth picking up and valuations are attractive. Today we are getting the Large Cap stocks at lowest valuations in last 15 years.

Since the valuation is at the lower band of Price to Book valuation multiple in the last 15 years, this is a fantastic time to invest in a Large Cap Fund. This is the reason why we are coming up with a Large Cap NFO at this juncture.

This is the time to invest in equities as an asset class. All stocks look cheap today after the massive fall, so buying into a good fund in Lumpsum makes sense. Time to SIP /STP was in 2017 and now is the time to buy into equity funds and make wealth. My advice to investors is that “Buying” into bust and “Selling” into booms is very much required to create good wealth for yourself and for your investors.

We are bullish on domestic cyclicals sectors such as auto, cement, consumer discretionary and industrials as they benefit from lower oil and commodity prices. The economic recovery further aid to the economic recovery. We are also bullish on corporate banks and industrial commodities which are trading at very attractive valuations.

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

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