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A market correction of 5-10% is okay: BOI AXA

Somewhere there is a disconnect and maybe the market is talking about inflation but I am not convinced right now and I will be more worried if I see the bonds rallying big time, says Alok Singh, Head of Investment, BOI AXA.

Some of the stocks in the pharma and the chemical space in your funds are in some of the best performing quartile. How early did you get into that space and what worked for you?
We started investing in chemical names quite early when the first set of this pollution-related issues started coming from China. Some amount of shift had started happening in India and at that point in time, it was more of a commodity thing because India had spare capacity. We started building on that and started getting incremental data that allowed us to have overweight positions in speciality chemicals and obviously that led to APIs, pharma.

If you look at our overweight positions today, it ranges from fertiliser, pesticide, API, speciality chemicals to pharma. So it has been there for over two-and-a-half years. We have been running these positions. Obviously in the last six-eight months, the conviction of the market is getting pronounced over there and we have seen price action over there. Having said that, from a historical perspective, they still are in the middling kind of valuation. They are not expensive and if you look at the forward growth rate and especially the quality of the growth rate, this is one of the sectors where we are actually seeing quarter on quarter earnings upgrade. That is how we are keeping faith and our allocations remain high in this category.

What exactly are you looking at right now as an opportunity?
The other sector which did well for the market was IT. Now typically IT’s got a sweet spot because of this pandemic issue and cash being there and ROE has been protected because of buybacks and things like that. But look actually, IT had seen earnings downgrade cycle and the margins from 20s came down to around 15. But now we are seeing that there is a structural change in IT and Indian IT can play a role in that and that is why IT is one of the other sectors we are positive on and that has a higher weight in our portfolios.

Financials is something which we believe that may turn the corner now primarily because the incremental data is decent. I will not say it is very good but it is decent and the fear of the pandemic could have emerged again and the markets may have reacted but I think they will settle as they look at more data and the quarterly earnings are anyways around the corner.

In terms of our underweight, energy and FMCG are what we would be underweight in most of our funds barring some amount of consumer goods.

Risk of the second wave of virus spread and lockdowns in certain parts of the globe is making the market nervous. US technology stocks are kind of topping out and the emerging market dollar index is also rising again. There will be an election in the US in the next 40 days. Do you see medium term or near term risk on the table?
There has been a surge in some of the European countries but if I look at global data as an aggregate, if you look at the number of deaths or the cumulative numbers, I do not see any major diversion over there. The Indian data for the last one week shows the aggregate number has come down. It had peaked at around 1 lakh a day, it is in 80s now. The number of positive cases are lesser than the recoveries so I do not know whether we have turned the curve or not, but certainly it is not getting uglier.

If you look at the market, I have read it this way that after a wonderful run, we had a consolidation phase for the last two weeks and that is what may have frustrated many of the traders because running a position is a cost but not for a long only fund like us. So I am not too worried. It has been corrected from the top and if that is anywhere between 5% and 10%, it is an okay correction. Yes, the dollar index has moved up towards 94 but I have to look at it in conjunction with the bonds. In the last two-three days, while equity markets have corrected, dollar indexes have risen but bonds have not rallied that much. Somewhere there is a disconnect and maybe the market is talking about inflation but I am not convinced right now and I will be more worried if I see the bonds rallying big time.

I believe that the bond market is the lead indicator of macroeconomics. I do not see macro economic conditions deteriorating as what may be the equity market is worried right now but having said that, it is not right to rubbish anything, we need to look at it and if the data emerge which as of now I do not see taking that shape, I see this as a correction. But yes as you pointed out, going forward in the next 40-50 days, the US elections are on and that I see as a risk because even if Mr Trump gets elected, his focus may change post winning the election and that may pose some risk.

But in today’s volatile market, a month is quite long and there is a lot of data which can emerge. As of now, we are happy with our allocations and we see earnings growth there and we will hold on to it. Financials is something which we need to look at more carefully and also IT, especially their valuations. If I look at Nifty IT and Nifty ratios, then we are close to where we saw it last in 2000. The ratio is around 1.78 and most of the time it has traded between 1.5 to 1. So, certainly it is on a higher side and there are a lot of expectations that the earnings will be better and around the earning season, we are expecting to come out with their numbers soon and that is one of the lead indicators. Having said that, I will be cautious on IT because of the valuations.

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