Jyoti Vaswani

Originally published at: https://www.moneycontrol.com/news/business/markets/daily-voice-indias-long-term-story-not-derailed-but-delayed-by-a-few-quarters-says-jyoti-vaswani-of-future-generali-insurance-5632621.html


We remain undeterred bulls on India's growth story over the long-term. We are of the opinion that the long-term structural India story is not derailed but has been delayed by a few quarters, Jyoti Vaswani, Chief Investment Officer, Future Generali India Life Insurance Co Ltd, said in an interview with Moneycontrol’s Kshitij Anand.

edited excerpts:

Q) Last three months have been volatile for the Indian market but bulls managed to push the index by about 50 percent from the lows? Are we out of the woods?

A) Markets by nature are unpredictable and more often than not, have a tendency to take the investors by surprise. Equity markets have had a tough last few months because of COVID-19.

The extent of the move in the market has surprised the market participants on both the way down and the rebound since, that too, in less than three months. This is indeed a classic testimony of markets' random behaviour.

But, the key lesson learned from these unpredictable market moves is that markets are indeed a forward-looking animal and are probably envisaging recovery from here on, with the probability of a vaccine in near to medium-term.

Nonetheless, we believe that one should not get swayed by the rally and should exercise a certain degree of caution, as we may not be completely out of the woods yet, given the rising cases in India with the unlocking leading to localised lockdowns.

The sustainability of the rally would hinge upon the sustainable degree of recovery in economic activity and if there is a second wave or not after we open up completely.

While we have indeed witnessed significant improvement in sequential momentum in most of the high-frequency indicators, they seem to be plateauing out now at nearly 80 percent of the pre-COVID levels for most variables, owing to localised lockdowns.

With the virus now spreading to newer cities and smaller towns that are facing intermittent lockdowns, we believe that the road to recovery may get slightly prolonged than anticipated earlier.

So if the return to pre-COVID level demand indeed takes slightly more time, the profitability of India Inc may remain under stress in the near-term.

Having said this, we remain undeterred bulls on India's growth story over the long-term. We are of the opinion that the long-term structural India story is not derailed but has been delayed by a few quarters.

Q) What was your strategy to deal with the COVID-19 related volatility?

A) Since we as an insurance company offer a long-term investment vehicle in the form of insurance, we take the liberty to make long-term calls (while being cognizant of short-term headwinds) and have considered the same in our portfolio construct and to partake in the rally.

During the fall in markets in the month of March, while a large part of the investment community was clamouring for the markets to test lower levels, we went against the conventional wisdom and the consensus view and built a stable long-term portfolio at attractive valuations.

COVID-19 was in the front and centre of Investor’s mindshare, as markets were in fear. This fell perfectly in line with our investment philosophy of investing in growth at reasonable prices with a strong focus on cash flow generation ability of the business and low leverage ratios.

We took the current market volatility as an opportunity and worked to create sustainable building blocks to generate long-term returns for our esteemed investors.

In fact, we have been able to glide through these turbulent times relatively better and our flagship funds have given good returns of over 50 percent since the bottom of the markets, outperforming the benchmarks by a wide margin.

Q) Any particular investment philosophy which you follow while making an investment?

A) Our investment philosophy is Growth at a reasonable price (GARP). We believe in investing in structural growth story with strong and quality management at fair valuations.

While we are very cautious about the valuations that we are willing to pay for the stock, we are not averse to paying a slight premium if there is a conspicuous extended runway of growth for the company, but not exorbitant multiples.

We prefer companies with a strong balance sheet, low leverage, and strong cash flows. Also, at times looking at the valuations from the perspective of the multiple, camouflages more than what it reveals and hence it is important not to get overly focussed on multiples and focus on various other ways to evaluate a company.

Q) News about the privatisation of some PSUs really got the market excited. What are your views on that?

A) Privatisation is the need of the hour in our opinion. PSUs have been inefficient capital allocators and have destroyed a lot of shareholder wealth over the past decade.

Several of these companies don’t operate in areas of strategic importance for the government and hence should be privatised. Only the industries of strategic importance should have government-controlled entities operating in it.

Privatisation of PSU entities will be beneficial for all the stakeholders, as the government would get the funds to reduce the fiscal deficit, the new investors can get a chance to invest and partake in growth story and can at the same time bring in a lot of efficiencies and better management practices in the PSU organisations.

Going forward, even a single successful privatisation, in our opinion, can lead to significant rerating of the entire PSU pack, which will also bode well for the future divestment targets of the government.

Q) There are talks of another stimulus package after the vaccine? What would you be betting on?

A) In our opinion, the second round of stimulus is a question of ‘when’ and not ‘if’. While there have been some promising developments over the last few weeks with respect to COVID-19 vaccine, with several teams doing their third phase of clinical trials, it’s unlikely that there will be a vaccine ready by September/October.

We expect the fiscal stimulus to not be very large in nature given the tight fiscal position and we continue to bet on investments that will reap the benefits of these measures directly or indirectly.

Q) Which investment themes can one could consider in the current environment?

A) There are several factors that go into consideration while constructing a portfolio. We believe that building a COVID proof portfolio is a ‘Misnomer’. In the current highly uncertain and volatile environment, we are willing to overlook near term P&L pressure while focussing a lot more on balance sheet and cashflows.

Two very important metrics to be considered while constructing a portfolio are- leverage ratios and cost structure of the business.

We are refraining from businesses that have high financial or operating leverage. There are sectors like Consumer Staples, Telecom, Insurance & Brokerages, and Pharmaceuticals that can benefit from the demand creation due to COVID-19 and hence are likely to show higher-earning resilience. Accordingly, we are overweight in these sectors.

Q) At a time when the world is factoring in over 5 percent decline in GDP growth for Indian markets, and equally grim picture for the world. How can equity investors turn this into an opportunity?

A) It’s a time tested fact that markets come back from every correction and eventually make new highs. Investments made in these tough times have reaped substantial returns, as exemplified during the global 2008 crisis, demonetisation etc.

This time will be no different and there is no reason for this trend to reverse. Indian equity markets have bounced nearly 50 percent from its lows in March, at a time when the world is staring at a sharp decline of 5 percent in GDP and slowdown across the globe.

If you’re investing for the horizon of the next five-ten years, then your focus should be on these compelling opportunities and the ways to harness it. One should keep investing as per goals and leverage on these falls in the markets.

Q) Lot of new investors have joined the party on D-Street in 2020 – could be largely due to work from home, muted returns from MF, or extra income at a time when there are job losses. What are your views – will the trend sustain?

A) While the number of retail investors has been rising steadily over the last few years both directly and through mutual funds, the current addition could be attributed largely to a dearth of alternative investment opportunities.

Given that the interest rates are so low and gold prices have shot through the roof, the only alternative has been to invest in equity.

It’s a known fact that equity markets do entice a lot of new and novice investors. The unfortunate part is that most of the time, these new investors come to make quick returns in the markets, but that’s not how markets normally behave.

There is never a free lunch or a risk-free opportunity. The new breed of the investors who have forayed in the equity markets post the fall in March have not seen a portfolio drawdown hitherto.

In fact, over the last nine weeks, we have had only one week with negative returns for the Nifty and midcap index (Nifty has moved from 9,000 levels to 11,300 levels i.e. nearly 25 percent). The litmus test for these investors would be when they see the market cycle turn.

As far as the question of this trend sustaining is concerned, we believe that the answer lies in ‘behavioural finance’. Can these investors see their portfolio in losses and still not panic once the correction starts.

Does the investor have the mental strength to book losses and still continue to participate in markets. When you run an individual portfolio, most of the time it tends to be concentrated in a few stocks (10-15 stocks at max), which exposes the portfolio to significant risk.

This is in stark contrast to an institutional portfolio like that of Insurance or Mutual funds, which are far more diversified and hence have lower volatility, thus reducing the risk significantly.

We reckon that while investors may taken some direct exposure in equities, still a large portion of their investment would be routed through the less risky institutional route, to take care of their long-term needs.