A master take on lockdown- in conversation with Raj Mehta

Interview with Mr. Raj Metha on 20 Apr 2020

Raj Metha PPFAS Mutual fund

PPFAS Mutual Fund
Fund Manager

Starting his career as just an intern with PPFAS Mutual fund in the year 2012, Raj Mehta didn't stop elevating his rank and now he is the Fund Manager of the company

He is not just a commerce graduate from N.M. College and a fellow member of the Institute of Chartered Accountants of India (ICAI) but also a CFA charter holder. He has also added a certificate for the NSE Debt Market Module which is jointly issued by NCFM and FIMMDW. He has also been appearing in several tv channels and has also been a renowned columnist in publications focussing of financial updates

1) Large parts of the world are under total or partial lockdown due to the Coronavirus and economic activity severely affected. What are your views on the short term and long-term global impact of Coronavirus?

Let us first accept that this is something that is unique and has engulfed the entire world population. To gauge the impact of this is going to be quite difficult. There is going to be an impact on both the supply side as well as the demand side. The supply side is something that will take some time to come back at full capacity especially in the most affected areas globally. Demand is something which can bounce back quite sharply except for some sectors like travel, hospitality, aviation, etc.

The concern here is more about contract workers, daily wage earners, freelancers, employees in affected industries who have been told to go on leave without pay and the long-term impact of this unemployment globally. In terms of finding a treatment for COVID-19, we are better placed than where we were 3 months back. Social distancing and lockdowns have helped to flatten the curve globally. Fragile businesses with a high amount of leverage could face survival risk as this lockdown continues.

2) The Indian economy was already in a slowdown before the lockdown. What will be short term and long-term impact of Coronavirus on the Indian economy?

Indian economy had been facing issues even before the lockdown mainly due to some policy changes which this government made. Policy changes in the shorter term usually lead to these short-term disruptions but they are necessary for the longer-term benefits. I am particularly impressed by how both the central as well as state governments have collaborated to come out of this and ignore all the political differences. Unemployment or no fresh hiring in a few sectors is a bit concerning but apart from that, I think the economy will bounce back sooner than later and we will come out stronger from this pandemic.

3) What is your outlook on the Indian equities markets in the short and long term?

Short term market movements are the most difficult to predict. As Ben Graham has said that in the short term, markets are like voting machines whereas, in the long term, the markets are weighing machines. So, no one knows where the bottom is or when the market will be formed. But it is easier to estimate that even if 3-6 months earnings of companies are affected by the pandemic, the correction in the markets and particularly in some stocks are a bit overdone.

4) The Nifty has fallen this year. Are the large caps attractive from a valuation viewpoint now?

Nifty has indeed fallen, and the large caps have corrected from the top. Similarly, we saw a correction in mid and small caps in 2018 & 2019 and hence they fell in tandem with the large caps. If you see long term returns (say 5-7 years plus), you will notice that more or less the returns for all market cap indices are similar. In shorter periods, there might be large-caps outperformance or small caps outperformance but in the longer term it all evens out. Hence our focus has always been to select stocks on a bottom-up basis where we evaluate the fundamentals of the business in detail regardless of whether it is a large-cap or mid-cap or small-cap stock. All the attention should always be on finding businesses with some competitive advantage run by great management and which are available at reasonable prices.

5) The RBI in its recent MPC meeting cut reports rate by 75 bps and announced some liquidity measures. What is your outlook on the Indian debt markets?

RBI has been proactive in the measures that it has taken to take the economy out of doldrums and come back once this pandemic recedes. RBI has taken a lot of measures which will help in better rate cut transmission, provide liquidity to the markets, reducing lending rates, reduce reverse repo rates so that banks have more incentive to lend to the consumers, etc. I am particularly impressed by the all-round measure that the RBI has taken to revive the economy. Outlook on the debt markets is that we will see lower repo rates and hence lower returns on liquid and overnight funds (in-line with the fall in savings accounts rates announced by banks).

6) What is the investment strategy post the lockdown?

Going into this market fall, we were sitting on about 10 percent cash in our flagship scheme Parag Parikh Long Term Equity Fund and about 20 percent cash in Parag Parikh Tax Saver Fund. As of last month, end, we were almost fully deployed in Parag Parikh Long Term Equity Fund and had about 10% cash in Parag Parikh Tax Saver Fund, but we would soon be fully deployed in both our equity funds.

The sectors that we like are private sector banks, non-lending financials, technology, and automobiles. Consumer staples are a space that we like but the valuations there are pretty stretched.

7) What are your views on risks to FY 2020-21 fiscal deficit target and bond yields creeping up due to the Coronavirus? How should investors plan their fixed-income investments for short to medium term (2 – 3years) and long term (more than 3 years) in the current environment?

The fiscal deficit numbers for this year will be all over the place. With the economy in lockdown for almost 2 months, the tax collections will be much lower than projected. Divestment targets which the government had might not be achieved and there will be some welfare measures for the poor to come out of this. All this will lead to a higher fiscal deficit, but we should not be too worried about it. Globally, the interest rates are zero or negative and everyone is flush with liquidity. I do not see yields going up too sharply. It is better to stick with lower maturity fixed-income categories for now. Credit is something which according to me is not properly priced in India and hence it may not make sense for investors to get cute in their debt allocation. Stick to liquid/overnight funds for short term requirements and GILT funds/ Banking and PSU debt funds for longer-term horizons.

8) Should investors use the correction in stocks to increase their exposure to equity? What is your general guidance to investors?

In my opinion, the correction in the markets is a bit overdone and the markets will recover before the actual economic recovery happens. Our advice to the clients has been to stick to their financial plans and do not get perturbed by these volatile market moves. Investors who are investing via SIP's should stick to the staggered investing.

This perhaps is the worst time to stop your SIP's. Our advice to the clients has been to keep investing in a staggered manner over the next few weeks. No one knows where the bottom is and when will the bottom be formed. It all looks good in hindsight. This too shall pass!

Disclaimer: Views expressed are personal