Mr. Neelotpal Sahai
Head of Equities & Fund Manager - HSBC Global Asset Management, India
Neelotpal Sahai is currently Head of Equities and Fund Manager since September 2017. He has been a Senior Vice President and Portfolio Manager in the Onshore India Equity team in Mumbai since 2013, when he joined HSBC. Neelotpal is responsible for managing three HSBC Mutual Fund equity funds.
Neelotpal has been working in the industry since 1991. Previously, Neelotpal was Director at IDFC Asset Management Company Ltd in Mumbai, responsible for equity fund management, and held a variety of positions at Motilal Oswal Securities Ltd. In Mumbai, Infosys Technologies in Mumbai, Vickers Ball as Securities Ltd. In Mumbai, SBC Warburg in Mumbai, UTI Securities Ltd. In Mumbai and HCL HP Ltd. In Mumbai. Neelotpal holds a Bachelor’s degree in Engineering from IIT BHU–Varanasi and a Post-Graduate Diploma in Business Management from IIM Kolkata, both in India.
Q . The equity markets have risen noticeably from the recent bottoms in spite of no visible improvement in the economic scenario. What are the reasons for such a divergent trend?
Answer : We all would agree that COVID-19 has been a black-swan event for everyone and arguably the worst event since the WW-II, in terms of the resultant economic impact for global markets. However, the event itself was an unprecedented one, given that it was a medical / humanitarian crisis and there is no playbook available to assess the medium to long term economic impact of the same. We can classify its impact on the market in two phases – Lockdown phase and Post-Lockdown phase. During the lockdown phase, the market was gyrating to supply shock initially and later to potential demand contraction. In the post-lockdown phase, the markets have begun to look forward to resumption in supply as well as recovery in demand.
Equity markets are forward looking but the economic data is lagging. The economic data which will get published in the current period will pertain to lockdown period and in all likelihood it will be weak. However, equity markets will begin to look ahead to the opening up of the economy. It will begin to factor in resumption of supply as well as recovery in demand. This is one of the primary reasons of divergence in trends.
Additionally, swift monetary policy actions by the Central banks globally and in India, helped to calm financial markets while fiscal stimuli in developed economies in particular, aided/will aid demand recovery.
Finally, after the initial fall, the market valuations had turned very attractive. This, too, acted as positive tailwind for the equity markets to bounce back swiftly from the lower levels.
Q . In the shadow of the Covid-19 pandemic, how are equity fund managers managing their portfolios?
Answer : Let me provide our views and thought process in managing portfolios in the current environment. COVID-19 is potentially evolving as the biggest disruption in our living memory. Over the past couple of decades, we have witnessed disruptions giving rise to new themes and thereby creating investment opportunities. Be it the GFC crisis (financial markets disruption), Taper tantrum, DeMon and GST (both of which gave rise to the formalization theme), each set of crises have seen new trends emerging from the scene. COVID-19 being an unprecedented one at that, we believe that there would be an emergence of a new normal with impact felt across industries (thought the impact will not be uniform). Even before this disruption, the most prominent theme that drove our portfolio construction view was that of profit pool migration towards market share gainers. This has led to big companies becoming bigger and stronger. This theme was visibly across many sectors – notably among Financials, Telecom, Real Estate, Airlines etc. Due to the COVID-19 disruption, this process of migration will accelerate and it would be more visible in more disrupted sectors like Travel, Entertainment, Hospitality, Construction etc, apart from the earlier ones.
In the short term we are more positive on sectors that exhibit revenue and earnings resilience as the impact of the Pandemic and the resultant lockdown in the economy is not uniform across sectors. We believe that in the near term, growth will be scarce and the balance sheet strength of the companies will be challenged in a year like the current one. So a company that is displaying growth in earnings and has balance sheet strength will command a premium and market would be willing to pay. We believe that the revenue and earnings resilience is most likely to be demonstrated by segments that are in the business of providing basic and essential products/services. (Example: Consumer Staples, Healthcare and Telecom). We have a positive view of these sectors. We are also moderately positive on companies which would be beneficiaries of a benign crude oil price environment. These would be sectors where their raw material prices are linked to crude price. We are also positive on the beneficiaries of the global supply chain diversification, away from China. (e.g. Specialty Chemicals). Currently, we believe that private sector capex as well as govt capex will get delayed and we have negative view of sectors dependent on capex. We also have negative view on labour intensive sectors as labour market dislocation will take time to repair.
Q . The present crisis will throw up new winners and losers. Can you identify a few such sectors and market segments where the trends have started to play out?
Answer : From a medium to long term perspective, the current phase of disruption shall pave way for accelerated digital adoption by consumers as well as enterprises. We see telecom, internet economy, ecommerce, technology vendors etc to benefit from this disruption. On the contrary, this disruption could rewrite the business and operating models of some of the disrupted industries such as retail, real estate etc. and as portfolio managers, we are cognizant of the risks of disruption as well. Another long term theme is that of diversification of the global supply chain due to ‘China + 1’ strategy which could be adopted by corporates as well as economies. Over medium to long term many sectors could benefit if global investments could be wooed in. We believe that Specialty chemicals to be one of the winners as this sector is already a part of global supply chain and it could grow by winning more orders.
As mentioned earlier, we believe that the theme of the strong becoming stronger will continue to evolve and the disruption will provide a fillip and also likely accelerate this theme. So dominant companies in sectors such as financials, staples, discretionary, telecom, technology etc are likely to gain disproportionately as a result of this disruption. In financials we reckon it will be the large private banks and select NBFCs could gain (due to strong capital position, granular liability franchise, diversified asset base and digital adoption etc) while in technology, the tier-1 players shall benefit owing to vendor consolidation trends and superior digital capabilities. In sectors that are prone to maximum disruption, it would be the market leaders who would benefit disproportionately due to market consolidation, balance sheet strength and technological investments. This will be visible in sectors retail (QSR, multi-brand and single brand retail), travel / hospitality, multiplex and to a large extent in the real estate segment.
Q . What are your expectations on GDP growth rates and the corporate earnings for this and the next financial year?
Answer : FY21 will be a challenging year for the Indian economy on several counts. India is estimated to see a contraction in real GDP during this financial year. As per some initial estimates, real GDP is likely to decline by anywhere in the range of 2 to 5% during FY21. Despite reopening of the economy, the second order impact of the lockdown could be felt through several segments of the real economy, post lockdown. These are in the form of disruption in household incomes, employment losses especially in the unorganised sector (which is roughly 88% of India’s labour force), deteriorating asset quality of corporates (leading to default risk, lower capex, growth as well as hiring moderation), among others. Additionally, the fiscal deficit for FY21 (both Central as well as combined deficit including that of states) is likely to surge. This will constrain government’s ability in providing continued direct fiscal support to revive flagging demand. The investment cycle will likely be pushed back further. Since the global growth is also going to take a beating, the external demand is also likely to remain challenging.
Currently, full clarity about the lockdown as well as re-opening doesn’t exist. That is because the coronavirus pandemic is still ongoing and there is no drug or vaccine in vicinity. So, in order to estimate impact on economy as well as corporate earnings, we need to make assumptions. We are assuming that the current pandemic will slowly wean away (like in rest of the world) in another 30-40 days. Also, like the rest of the world, there won’t be a second wave of the virus outbreak. And even if there is one, it would be localized one and economic impact would be limited. Normalcy should return by 2HFY21 and thus FY22 would be a normal year. From a growth perspective the numbers would look strong as they would come on the back of weak FY21. Risks to these assumptions shouldn’t be underestimated but if these assumptions were right then FY21 corporate earnings would be similar to FY20 with sectors like Consumer Staples, Telecom, Healthcare, select Financials showing growth and sectors like Auto, Industrials, Metals, Real Estate, Technology showing decline. If normalcy were to return by 2HFY21 then FY22 would be a normal year. Both economy as well as corporate earnings will show robust growth in FY22. In this scenario, the sectors that would be meaningful growth in FY22 would sectors like Consumer Discretionary, Financials, and Industrials. Long term themes like increase in digital adoption and higher expenditure on healthcare will continue in the next year too.
Q . A lot of investors would like to know the suitability of Index funds. Why should one prefer an actively managed fund over an index fund?
Answer : Index funds mirror the underlying index and hence the portfolio will be created exactly in the same proportion as that of the index. This will mean that the portfolio composition will be driven by the index heavy weights based on the market cap and free float dynamics, which is not always the preferred outcome. Additionally, the index may not represent the optimal portfolio for the investors, as index constituents are diverse in their characteristics with presence across sectors. So while in an actively managed fund, the fund manager can take a view of limiting exposure to sectors or companies going through an extended cyclical downturn or other challenges, such a decision may not be possible in an index fund (as those sectors or stocks will continue to be present in the index replicated portfolio). So an actively managed portfolio presents the flexibility to capture ongoing trends and themes more effectively and also in a timely manner.
We have also been witnessing a narrow market performance over the past couple of years and this has led to a concentrated performance of select index constituents. Only a few stocks have driven the index higher while a large part of the index constituents have remained laggards. Active funds will be more flexible to capture such trends and build portfolios, which will better reflect the fundamental reality. As discussed in the responses above, COVID-19 is one of the biggest disruptions in our living memory and hence this event will throw investment opportunities in several areas and that may be market cap agnostic in nature. It is also equally important to fully analyse the adverse impact of the disruption in some segments and the need to stay away from them in order to enhance value for investors. An active fund will be far better positioned to take such calls as against an index fund (which could be market cap oriented and also with exposure to segments that could adversely get impacted by the disruption).
Q . What would you say to an investor looking to invest for medium to long term investment horizon for capital appreciation? What should he expect in the next few years?
Answer : As equity investors, it is very important to look beyond the short term and visualize the big picture canvas from a long term point of view. That is to look beyond a point when all the COVID-19 factors would have settled down and then the picture would be more clear. It is a clichéd term that equity is all about long term investing and short term will always be volatile. However, it is difficult to live this principle but those who have done it, have been very successful in creating sustainable wealth for themselves. Hence, there are no short-cuts in equity investing other than to stay invested for the long term.
If we look at India as an economy, it presents a great investment opportunity for the long term. India’s growing middle class and expanding working age population is expected to drive the consumption demand and this is a multi-year story with long legs. Growing disposable incomes would mean burgeoning demand for goods and services, rightly termed as ‘India’s demographic dividend’.
Beyond this disruption phase, India would remain as one of the fastest growing large economies in the world. India’s incremental contribution to world GDP hence will be significantly higher compared to our current overall share. This would eventually reflect in the market cap parameters too (i.e. increasing share of India’s market cap to global market cap). The ingredients are all in place – stable democracy, structural policy reforms undertaken over the past decade (GST, IBC, Corporate tax reform, focus on infrastructure etc). The recent proposals around APMC, labour and land reforms augur well in building a conducive environment for private investment to thrive in current decade and beyond. We also feel that over the medium to long term, this crisis could be a boon in disguise for India. A likely diversification of the existing global supply chains could work in favour of India.
As a result, Indian equities will be a rewarding place for investors with a long term investment orientation.