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Investment Insights

Chockalingam Narayanan, 
Head – Equities 
BNP Paribas Mutual Fund, India 

May 2020


Thoughts on recent fiscal measures announced

The measures announced are great from a structural perspective with supply side issues being addressed in a great manner. The sheer magnitude of the shift is quite noteworthy and can change the paradigm of the way the country can benefit from evolving trends like (a) Shifting of global supply chains; (b) Opening up of the agri sector distribution which could help farmers fetch a better realization for their produce; (c) inviting increased participation of private sector and foreign players in critical sectors like defence, mining etc. At the same time, measures that have been announced have also been particularly targeted to support the most disadvantaged sections of the society i.e., the SMEs/MSMEs in the corporate sector, labour and farm sector among individuals. The measures have also been taken in a manner where the fiscal position is not completely compromised and the monetary space is used more innovatively. This, in that sense, could well mean that the demand stimulus which some sections of the market or economy were anticipating, did not come through. But that’s the cognizant view that the Government seems to have taken – that this is a marathon and not a sprint. In this context, one also gets the sense that the health solution is still not available and hence the Government is likely to take measures based on how the situation evolves, rather than use all the bullets in one go.

Impact of these measures on the market

Our sense is that the markets started correcting with the onset of the virus – first was a supply side issue when it was constrained to China but became a demand problem when it spread across the world. With the health solution not found yet, the demand scenario is still evolving and there could be some continued volatility, if there are further waves of this virus. To that effect, the efforts by our Government and RBI (and similarly Governments as well as Central Banks across the globe) are buying time to soften the blow on the economic front. For the markets to get their mojo back, we need the demand side to bottom out with a fair bit of improved visibility – implying we find a solution on health front. In the meantime, what can work for a country like India is possibly that we could gain some relative market share globally in a few businesses like say Information Technology, Pharmaceuticals, Chemicals, Agriculture, Auto and related value chains etc. Such market shifts needs to be monitored more carefully and acted upon as they can prove to be sticky in the long run.

Thoughts on financial sector post liquidity measures

The liquidity measures and moratoriums have definitely bought the financial institutions, particularly the lending franchises, some time as far as asset quality issues are concerned. However, looking at the high frequency indicators, the return to normalcy is still a fair way off and in that sense, the asset quality pressures could eventually surface. Given this backdrop, we believe that financial institutions with weak liability side of the balance sheet are likely to find it difficult even now. Those with superior liability franchisees and higher capitalization could actually gain a lot of market share but even they could face some asset quality pressure in the next few quarters. The non-lending financial institutions, where we have good exposure, are actually well placed from a business perspective with some of them seeing this issue as a catalyst.

Expectations on flows to equity funds

It is difficult to time the investment behavior at a collective level. Monthly SIP numbers over the last few years have been steadily inching up and have not fallen off even in the current market fall, which is encouraging. One hopes this continues going forward as well. Historically, we have seen during periods of economic stress that there is a marked shift towards increased savings across various sections of the society. However, the slowdown could also mean potential job losses. This latter part is what one needs to be watchful of, as that can have an impact on the sustainability of the flow aspect for our domestic markets. If we manage to not lose too many jobs, then the propensity to save actually becomes a bit more at a collective level and that can be of help.

Emerging theme post COVID-19 crisis

With every crises, new investment themes seem to emerge, which have wealth creation potential. This time around, we have already seen that moving from financials space to other sectors. On areas or themes, rather than picking sectors, we focus on our BMV philosophy where we focused on (a) Business, (b) Management, and (c) Valuation. In the current context, because of the dislocation, cashflows and balance sheets of various businesses have seen a major change in few sectors, reasonable change in few sectors and very minimal change in few. Some have also benefitted at the margin. In that context, the common theme that has emerged in this cutting across sectors, even where sector is facing massive headwinds is few leaders benefitting disproportionately in terms of ability to gain market share in this phase of large dislocation. Market share gains are typically stickier and to that extent, our picks are more benefitting from this theme.

Earnings and economic growth estimates

Our analysis and street estimates both on bottom up and top down side is suggesting that Real GDP growth – by the sheer impact of the lockdown extended over 4 phases is likely to result in the Real GDP growth being negative 3 to 5% (Bloomberg estimates). Some of this cost could not be pushed forward given the moratorium and liquidity measures given. Depending on this, and based on a gradual restart of the economic activity, we see a case for flat to negative single digit fall in EPS at the large cap index level. For the mid and small cap index levels, this can be more. More than the accounting earnings, what we are following are the operating cash flows (OCF) and free cashflows (FCF) which are more volatile. We are looking at what the stable state OCF and FCF can be for some of these businesses are and what values those imply for the companies. Post that wherever we see industry leading franchises with good cashflows that filter through our BMV process, we own those businesses. While we have been significantly focused on High growth and quality business for last many years, with overall near term growth likely to be impacted, we have added some exposure to low growth but strong cashflow generating quality companies as well which are attractively valued, whether it be in IT, Auto, Utilities or any other sector.

Opportunities in mid and small caps

Rather than looking at companies in a straightjacketed fashion in terms of midcaps or small caps, we look at it more on basis of whether we own companies that are good and those that filter through our BMV filters. When we look at what filters through our process in the current situation, we do note that a greater proportion of them are today in the large cap space and accordingly our preferences are skewed towards the large cap space (arrived through bottom up stock selection). Having said that there are some good industry leading franchises with good cashflows, run by able managements, with long runway for growth at attractive franchise values even in the mid and small cap space.

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DISCLAIMER

The sector(s) mentioned in this document do not constitute any recommendation of the same and BNP Paribas Mutual Fund may or may not have any future position in these sector(s).

The material contained herein has been obtained from publicly available information, internally developed data and other sources believed to be reliable, but BNP Paribas Asset Management India Private Limited (BNPPAMIPL) makes no representation that it is accurate or complete. BNPPAMIPL has no obligation to tell the recipient when opinions or information given herein change. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. This information is meant for general reading purpose only and is not meant to serve as a professional guide for the readers. Except for the historical information contained herein, statements in this publication, which contain words or phrases such as 'will', 'would', etc., and similar expressions or variations of such expressions may constitute 'forward-looking statements'. These forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those suggested by the forward-looking statements. BNPPAMIPL undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date thereof. The words like believe/belief are independent perception of the Fund Manager and do not construe as opinion or advise. This information is not intended to be an offer to sell or a solicitation for the purchase or sale of any financial product or instrument. The information should not be construed as an investment advice and investors are requested to consult their investment advisor and arrive at an informed investment decision before making any investments. The Trustee, Asset Management Company, Mutual Fund, their directors, officers or their employees shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages arising out of the information contained in this document.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing.

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