How to make share market work well for you: Learn from history, take advantage of volatility

Sachin Shah, Fund Manager, Emkay Investment Managers says in an interview with Kshitij Bhargava that there are signs of economic revival and valuations are also more reasonable within the broader markets.

With the domestic share markets on a roller coaster ride for the last few days, investors must not lose calm, and rather take advantage of the rapid rise and fall. Investors must remember ‘history repeats itself’. Judging by that history, markets are likely to perform well in the long run and shrug off losses made during the week, says a fund manager with a major brokerage firm. Sachin Shah, Fund Manager, Emkay Investment Managers says in an interview with Kshitij Bhargava that there are signs of economic revival and valuations are also more reasonable within the broader markets. With this, he has his eyes set on small-cap and mid-cap stocks, which he says have the potential to outperform over the next two years. Here are the edited excerpts:

How should one invest money in the share market when fear of Coronavirus seems to be a huge factor in navigating the markets globally?

There are two certain things about markets – First, they will always fluctuate in the short-medium term and second, they always go up in the Long Term (5-10 years). So, investors who are looking to invest in equities, for a longer-term, should always take advantage of volatility (when markets are down) to allocate more money to equities. There will always be different reasons for volatility in the markets and yet they will have similar patterns of fear and greed, it’s important for investors to learn from history and act accordingly as history repeats itself…

What is your analysis of the SBI Cards IPO?

SBI Cards is the first exclusive cards business to be listed on Indian bourses. The penetration of credit cards in India is still quite low and SBI Cards, being among the top 2 market shareowners in the card business, has a dominant position to grow the business exponentially over the next few years. We have seen the excitement that long term investors have shown for the life and general insurance companies, in the last few years, as the listing of those businesses was also unique to Indian bourses. SBI Cards at the IPO price valuation is definitely an attractive investment for long-term investors. There will be a significant premium on a listing day, at that point in time how much of the near term positives of the business is already discounted in the price will depend on the premium on listing day or during the first week of listing.

The domestic economy is not showing any positive signs right now, still, the markets are doing relatively better. Why are the markets not reacting to the situation in the domestic economy?

Yes, 2019 was a tough year for the Indian economy. The rally in markets during 2018 and 2019 was very narrow and quite polarise with very few stocks, even within the large indices, delivering positive returns. Although 2020 has begun on a positive note for overall markets, participation has been quite broad-based. Here we have to remember markets are always forward-looking, there are a couple of positives at the ground level, for example, the monsoons have been quite good and wide-spread, which has increased the groundwater levels and reservoir water levels helping the sowing for Rabi crop. Higher agri yields and also better price realisations for agri commodities should increase the incomes in the rural economy, in turn reviving the aggregate demand growth for the overall economy. Secondly, RBI has been reducing the interest rates and also pushing liquidity in the system, in fact in the recent RBI credit policy there is a clear push in the targeted sectors like Auto, MSME and Real estate, these measures should definitely get back the growth in the economy.

What are the major takeaways from the Q3 earnings?

Most of the corporate commentaries indicated low activity at the ground level, particularly in rural areas. But a lot of companies have done an incredible job on cost management, in spite of lower or flat (in some cases) top-line (revenue) growth we have seen most of the good companies maintaining their profitability (margins) at operating levels and due to corporate tax cut benefits the bottom-line (PAT) has actually grown.

Where are you looking to invest in the coming quarters? Small-caps, midcaps or large caps?

For the last two years, the broader markets were quite bad, in fact, the BSE MID Cap Index was down by 15% and BSE Small Cap Index down nearly 28% over the last two years of 2018 and 2019. Clearly, there has been a reversion to the mean after the strong rally of 2016 and 2017 for mid and small-cap stocks. Also, due to economic downturn, there has been a flight to safety even within the equity allocation and most of the equity allocations have been invested in a handful of blue-chip companies, in turn, pushing their valuations to significantly higher levels. Now, as there are signs of economic revival and valuations are also more reasonable within the broader markets, I would like to believe mid-caps and small caps have the potential to outperform over the next two years.

The telecom sector is in a whole lot of trouble and telcos are taking banks with them. Are telecom stock a definite No-No for now? What about Banks that have large exposure to the sector?

There has been a significant amount of consolidation in the telecom industry, from more than seven-eight players it is now down to just four-player market. The recent developments on AGR fees dues have made it pertinent for the industry players to increase the tariffs and recover the money from customers to keep servicing the customers. Higher tariffs should definitely benefit the top 2 players in the industry as their profits will grow at a much faster pace now.