Home > Finance > Sectors to bet on: Look beyond largecaps and focus on dominant sectoral names: HSBC AMC

Sectors to bet on: Look beyond largecaps and focus on dominant sectoral names: HSBC AMC


When it comes to urban recovery, one would be waiting for a whole set of data points to come, says Neelotpal Sahai, Head of Equities.

Are we going to come to a fag end of this rally; not just in India but across the globe? What is the sense that you are getting and what do you make of the kind of levels that we are witnessing right now?

Let us first try to understand why the market has been rallying after a decline in the month of March. The primary reason for that has been that the market began to look ahead for the forward data of the period of opening up. So after the company shutdown for the month of April and May onwards when it began to open up, instead of looking back at the economic data, which obviously would have been very weak, the market began to look ahead when the economy would have opened up and how the data is looking forward. On that account, the market began to track the number of activities on a week by week basis, month on month basis and there has been a gradual improvement but improvement nonetheless on most of the parameters.

The second point is initially the monetary stimulus which the central banks did had an impact on the markets but later on, especially in the developed markets the bond purchases have put a lot of liquidity in the market and is now chasing the higher PEs and that also has helped in the FII flows to reverse which was negative in the month of March, flat in the month of April but significantly positive in the month of May and June. Also what we see is, on the pandemic front also, the kind of understanding which the market has is that there would not be any second wave. We have not seen that in many other places and even if there is one, the economic impact would be limited; hence the rally in the market is there.

Now what the market is actually factoring in is that there would be an improvement in the economic output and hence the recovery; but a slow one at that but. At the same time, it is also factoring in that inflation would continue to remain weak for an elongated period and interest rate will remain low and to that extent, those are also supporting the valuation construct. We do not have a problem with any of these forecasts or the assumption that the market is making. So at this point of time, one does believe that the risk and demand is balanced. The valuation metric on the earnings related valuation metric market may have peaked and gone higher than the average but on many other metrics, it is still okay and kind of balanced from here.

I just wanted to touch upon the NFO that is the HSBC Focussed Equity Fund. Can you give us a sense as to what is going to be the overall sectoral thrust and what is the outlook here?

The important point is that it is going to be a focussed fund. The reason is a trend that we were seeing for sometime was that there was a polarisation of profit within many of the sectors and it was happening on account of the disruption in many of the sectors in the past two to three years. In the past also a similar trend has been seen that after disruptions in the economy, there has been a polarisation of profit. So when the pandemic happened, it impacted many sectors at the same time, which is unprecedented. Thus it is impacting a number of sectors. So we thought there would be a polarisation of profit in many sectors and that will throw up a number of ideas. In order to benefit from the many new emerging themes and ideas, we thought a new focussed fund would be the best option.

Now within the focussed fund, our thought process is to look at the dominant players in each sector which is where the profit pool would be migrating to from the weaker players in the sector and to look if their profitability can be sustained for a longer period. So that is what initially we are looking for. Now from the medium term also, a number of opportunities have been thrown up on account of the pandemic or even without that for that matter. For instance, there is a higher digital adoption by both consumers as well as enterprise. We believe that this particular trend can continue further and it can become a normal in day to day life also; which means businesses and the enterprises in the business of providing service discounts actually are going to benefit for a medium to long term period also.

An additional theme and trend which was also ongoing and now probably will accelerate is the fact that the investments in the global supply chain was diversified. Initially it was a China-centric global supply chain but for the last couple of years, and now after the pandemic, this trend will accelerate a number of corporates and countries will want to ensure that their supply chain is more diversified.

We believe that some of the sectors in India are in a better position to attract things. For instance, it could be speciality chemicals; so that will be another idea. However, if I look at the near term, our thinking is that there are certain sectors which may reach almost 100% of their normative sales although some of the sectors are lagging behind. So there is a higher earnings in certain sectors and those in the business of providing essential goods and services, healthcare and maybe also telecom. So those would be our primary choices and the ones where the normalcy would return later in the year or probably some of them will come only in the next year; those would not be our choices at this moment in this fund.

Do you think it is advisable now to look just beyond some of the marquee names within the frontliners or the largecaps and even expand your horizon and look at quality names within the broader universe? What is the advice when it comes to dipping into sectors within the broader markets?

Let us not focus on only capitalisation. My sense was to look at the dominant companies in their respective sectors. There are many sub-sectors where the sector itself is small or the dominance would be in a particular location, geography, particular product category or maybe for a molecule. So that can also sustain profitability and those would be from the broader market and not necessarily in the higher market category. So when you are looking for ideas, we have to look beyond the top names and the largecap names and should be focussed on the dominant names in respective sectors.

When we look at the kind of recovery that we have seen so far, it has been largely on the back of rural recovery or companies that are coming back to pre-Covid normalcy in terms of operations. Are you still concerned with regards to the urban revival? Are you looking for further reports or indicators in terms of data or are you convinced what we are hearing so far?

When you look at the rural economy and the urban economy divide, we do see that rural is recovering faster. It is also on account of better monsoons. At the same time, we have also realised that bulk of the fiscal stimulus that the government is providing is going into the rural economy and that also would be helpful in keeping the demand intact and that possibly are the reasons rural is recovering faster.

When it comes to urban recovery, one would be waiting for a whole set of data points to come. Which is why one is actually tracking data on a week on week basis and on a month on month basis to see even if there is a gradual improvement. But when one is looking at a company from an investment perspective, one need not only be focussed on what is happening right now and one should rather be focussed on what a normal 12 months will look like and when will that normal 12 months begin. For instance if the current data shows 70-80% of the normal sales but it is likely to go to 90-95% in a couple of months and maybe 100% by the second half, then a normal 12 months will begin from the second half onwards. Then from the valuation metric, especially the earnings related valuation metric, we should be looking at 1 October to next year 30 September to get a better sense. For some other companies, it could have already started even in the urban areas, especially in the FMCG category, some of the healthcare categories, telecom sector and tractor sector.

So for them, a normal 12 months has already begun and this period can be looked at. But for some other sectors, especially capex intensive sectors or the labour intensive sectors where the normal 12 months would probably begin much later, there also one is tracking data and the data is actually quite low even at this point of time. Even after reversal of the reverse migration happens and even if the capex push is there, we still think that will still take some more time for the normal 12-month period to begin. Which is why we are a little hesitant at this point of time to get into those sectors. But you are absolutely right that we should be looking at data more closely and then go for those sectors.

Source link

TAGS , , , , , , ,
Hi guys, this is Kimmy, I started LicensetoBlog to help you with the latest updated news about the world with daily updates from all leading news sources. Beside, I love to write about several niches like health, business, finance, travel, automation, parenting and about other useful topics to keep you find the the original information on any particular topic. Hope you will find LicensetoBlog helpful in various ways. Keep blogging and help us grow as a community for internet lovers.