What to buy/avoid: Nilesh Shah, Navneet Munot answer | Economic Times

Some of Dalal Street’s leading fund managers Navneet Munot, CIO, SBI MF, Nilesh Shah, MD, Kotak Mutual Fund and Anand Radhakrishnan, CIO, Franklin Templeton Mutual Fund, spoke at an online event organised by IMC on various issues related to the markets and the economy. The chat was moderated by Gautam Trivedi, co-founder of Nepean Capital. On GDP Falling, Markets RisingAnand Radhakrishnan: The equity market is wearing a double hat at this juncture. On one hand, it is looking at extremely short-term growth trends and on the other hand, it is looking at what can happen over the next 1-2 years. The initial fear during the first phase of lockdown was fear of the unknown. This led to dramatic response from both market participants as well as managers of the economy. I think there is still a long way to go for recovery. Embedded in the current optimism is the idea that a solution will be found for the current pandemic over a period of next 3 quarters and that is important to sustain the current optimism.Nilesh Shah: We have seen a lot of factors at play in the market. Valuation has expanded based on lower cost of capital, or lower return of capital in alternative assets. At the bottom of the pyramid, in penny stocks, there is new investor money rushing in and based on our experience of the past it's driven by flows rather than fundamentals and a combination of multiples. If I were to summarise, data is about the past and the market is discounting the future. Foreign Inflows amid Fed-induced Liquidity Navneet Munot: A large part of the rally has to do with liquidity and policy response that has been unleashed. As the crisis is unprecedented, the response too has been unprecedented to say the least. $3 trillion has been printed in 3-4 months, buying a wide set of assets and giving strong guidance that even if inflation runs, we are not in a hurry to increase interest rates. And that is the case with almost all other central banks in the world. On top of the fiscal stimulus. When you put so much money in the system, there is a demand shock. You cannot consume much and money reaches financial markets. That’s the reason all asset classes -- bonds, equities, gold -- are moving in tandem. Liquidity played a key role. This has also led to a large number of new investors, relatively inexperienced ones coming into the equity market. All bull markets begin on peak pessimism. Robinhood Traders and Mutual FundsNavneet Munot: The new investors make money in the first phase of the market. But my sense is that over a period of time, they would realize that it's better to spend time elsewhere and give money to professional money managers. The long-term trend clearly suggests that. Nilesh Shah: Online brokerages are not our competitors. They will help us expand our investor base as they offer ease of investing and the mutual fund industry can learn from them. All online brokerages are also distributors of mutual funds. Many of them responsibly put mutual funds as offerings to retail investors. Anand Radhakrishnan: I have one word of caution to most of the new people entering markets -- they cannot be called investors as many of them are traders. The retail percentage of volume in the lockdown period has gone up dramatically, suggesting that on a day-to-day basis, many of them are trading and not looking at it from an investment point of view. While at one hand, we can rejoice that more people are opening broking accounts, we may be opening a problematic situation where people have extra time and can make a quick buck. We are seeing mid, small and penny caps move up, suggesting a gradual building up of retail trading mentality than investment mentality. Of course, at some point this will have to change. Advice to Cash-strapped GovernmentAnand Radhakrishnan: Give large tax breaks for buying homes as currently what we are giving is very low and has been static for a long period of time. Home buying is a large driver of the economy including construction, mortgages and several home products. We are seeing an extremely bearish market in real estate and to revive housing, we need to give certain tax breaks. This may look like tax breaks initially but the volume of activity will more than compensate for lower taxes. That will help kickstart the economy and give revenues to the government. Second is strategic divestment without worrying about tax revenues and not wanting to cut back on spending. Key option is to sell non-core investments and they were talking about taking LIC public but we see very little progress with a lot of hurdles. Unless we make quick progress, the government won't be able to access funds in a manner which does not expand the deficit. Strategic divestment including divesting stake in government held organisations like SUUTI should help them buy buffer till the time tax revenues get buoyed. Government’s Weak Privatisation RecordNilesh Shah: We need to monetise government assets so that we have money available for spending. Government has 9,404 properties under the Custodian of Enemy Property Act. This was acquired during the 1965 war with Pakistan. Pakistan did this on their side and we did it on our side. Pakistan liquidated all properties in 1971. We are still 49 years behind them. These properties were valued at Rs 1 lakh crore a few years back. Maybe this is the best time to remove encroachment, clear title deficiency, liquidate these properties and raise Rs 1 lakh crore to fund your expenditure. The second thing is to bring India's savings from “tijori” (safe) to white economy. In the last 21 years, we have imported $376 billion of gold on a net import basis, excluding gold jewellery export. We all know gold smuggling is a reality. WGC believes 25,000 tonnes of gold lies with Indian households, most of it is in safes and unproductive. Gold financing companies have made a small beginning in monetising it but we need to magnify that. If we can come out with a very interesting scheme, that will help. Sectors to Invest/AvoidNavneet Munot: I believe negative real rates, falling difference between rental yield and mortgage rate and inability of builders to hold on to inventory and prices are headed lower and genuine demand will come back to residential real estate. I also expect NRI investments to come back, given where asset prices are and interest rates are. There is a possibility there is revival of interest in residential real estate. A little longer term, data is new oil. Digital India is a reality. Indians are the largest consumers of data in the world. E-health, E-education, entertainment have tremendous potential. Chemicals and electronics have support from the government. Nilesh Shah: We believe there are two sectors where there are long-term growth opportunities namely chemicals and contract manufacturing. There are many companies that want to buy chemicals from India and now we are seeing longer term contracts coming to one company. We have seen emergence of companies in consumer durables and consumer items like mattresses which were bought by global brands and distributed in India. Valuations are expensive but from a growth point of view, there is tremendous amount of growth. Contract manufacturing is a 20-25-year-old growth story assuming government does not intervene. Anand Radhakrishnan: Currently the most hated sector is financials. We have seen expansion of financial services in 2018. We have shrinkage and massive destruction of value after IL&FS and Yes Bank. The sector is rapidly consolidating with strong getting stronger and they will gain market share in 5-7 years with the weak being eliminated. Some NBFCs will never come back. This is a 4-5-year play. Hike in NPAs due to Covid and moratorium slipping to NPA. If the optimism of the economy is true, it will slip to small and medium enterprises.