The panic and disruption caused by the second wave of Covid-19 infections may cause markets to fall 5-7% from current levels, according to Carnelian Capital Advisors’ Vikas Khemani. But that may offer buying opportunities to investors.
“Probably around 13,000 to 13,500 levels [in Nifty], lots of people who kind of missed the last rally would come in to buy because post Covid some of the structural drivers of the Indian economy have fallen into place and they are not going back,” the founder of the investment management firm told BloombergQuint’s Niraj Shah in an interview.
Partial lockdowns, he said, may affect the smooth functioning of the businesses, impacting the pace of economic recovery. “We will have a sort of pause or some sort of short-term damage which we’ll have to live with from a Q1 to Q2 perspective, but recovery will happen.”
Some of the structural drivers of the economy such as information technology and manufacturing, Khemani said, are “game changers”, and that their recovery may slow down but will certainly happen.
The consumer discretionary segment, however, may be largely impacted due to demand slowdown, he said, prompting Carnelian Capital to shift out of those sectors. It’s waiting for an appropriate time to get back, which could either be right valuations or things settling down.
Carnelian Capital doesn’t invest based on technical views and has designed frameworks that can generate a risk-adjusted return over a 10 to 15-year cycle, he said. It picks companies with a high quality of business, checks for governance issues and performs forensic checks on business, balance sheet and promoters, Khemani said.
Of the investment firm’s three-part portfolio strategy, the “magic component” aims to identify and invest in high-quality companies going through phases of correction. This fall should be followed by a catalyst that will lead to accelerated growth in the earnings of a company, according to Khemani. When both happen together, he said, the stock would deliver superior returns over three to five years.
Citing an example of Carnelian Capital’s investment in Max Life Insurance Co. as part of this strategy, Khemani said it was a great business and the market was just worried about short-term dislocations. This fourth-largest insurer had a great portfolio, superior to most other players in the industry and was the first to use data analytics to identify its market, he said. The result was that the value of the stock doubled in two years and its market share grew in the first lockdown when the insurance industry contracted, Khemani said.
Khemani’s outlook on various sectors…
- Insurance: It was quite under-penetrated and he is reasonably confident of it compounding in the future.
- Banking: It’s strong as most balance sheets are fairly repaired and are ready for credit growth. Once things settle down, large banks with good balance sheets and management will deliver superior returns in four-five years.
- IT: With digitalisation and cloud migration being a very big theme, this sector has a global demand and Indian companies are the only suppliers. This demand, which has been accelerated by the pandemic, has resulted in every organisation looking to spend money on IT. Khemani has no doubt that Carnelian Capital’s structural investment in the sector will generate an 18-20% return.
- Manufacturing: Khemani is extremely bullish on this sector, as he expects a huge tail group of growth in the next five to seven years aided by government initiatives, China Plus One strategy and India’s own setup in terms of cost and competitiveness. A combination of all these things, he said, will drive the sector to a very different trajectory.
- Steel: It’s a volatile and globally sensitive sector and that Carnelian Capital is staying away from.
Khemani also expects a slowdown in initial public offerings, which would resume only when markets get back to normal.