What is your assessment of the current market situation?
From an earnings and valuation perspective, it does seem like parts of the market are a bit overstretched. While the economic impact is yet to play out, delayed recoveries typically leads to more structural reforms from the government.
How long can market sustain this without support from earnings?
The July-September period will continue to show weak earnings. It will be better in the next quarter since the festival season and a good monsoon will influence it. The last quarter of the year will probably be much better as further clarity emerges.
Going forward, we can look at this from the perspective of four key balance sheets – that of household, corporate, the financial sector and the government. The household balance sheet is impaired as incomes have taken a hit. Corporate balance sheet too is not too strong given issues around leverage. The financial sector balance sheet is connected to that and has been weak for quite some time now.
Despite stretched fiscal positions, governments world over are continuing to expand their balance sheet to absorb the short term pain by offering employment and income support. This should help in rekindling demand which is key to future growth and economic stability. India is no different and the Indian government has used innovative methods of direct (cash stimulus) and indirect means (credit guarantees) of financial support within its economic package. As a result, rural India is faring much better as a result of a good kharif and rabi crop in 2019-20, good farm procurement, steady and rising income transfers under the various government programs such as MNERGA and PM Kisan.
What should be an investor’s approach in both equity & debt section of MF portfolio in the current and post Covid-19 scenario?
Markets are uncertain. The recency of the pandemic impact will probably push investors to follow herd behaviour and over allocate to the safety of fixed deposits or gold. Hence, diversification and a risk appropriate asset allocation should continue to be the foundation for their portfolio. For equity, we continue to recommend a multi cap portfolio as there are opportunities across the spectrum. In the current situation, we recommend a review of equity portfolio to see if there is space to include international equities too. India is a $2 trillion market and the global market capitalization is around $86 trillion. Indian investors have a very high home bias. There are excellent companies with good growth prospects that are not available in the Indian stock market. An appropriate exposure to international equities will give a currency exposure and add to diversification.
On fixed income, the pain on the credit side is not yet over. On pure G-Sec portfolios, a lot of the juice is over but a rate cut later in the year could still present opportunities for sophisticated investors taking exposure to G-Sec or dynamic bond funds of high quality. We feel retail investors should stay in funds with high quality portfolios and low maturity and consider bank-PSU category funds for longer term money.
Is PGIM India looking at inorganic route to grow its business in India? What is the AMC’s growth strategy, going forward?
PGIM is the tenth largest asset manager in the world. India is definitely a country where PGIM would like to expand its footprint and become a relevant player. At an appropriate time, PGIM may consider inorganic route for growth. Current valuations may not be fully reflective of the reality and therefore, there is some time before we go in that direction.