In the time of COVID-19 when economic uncertainty persists, the domestic equity markets are holding onto the gains seen since March lows, says Swati Kulkarni, EVP and Fund manager, UTI AMC. The stimulus support and fiscal policy response of governments are making investors look beyond the Covid-19 pandemic.
Over $7 trillion worth of support measures globally may be driving the rally. Investors are drawing comfort from the extended support through monetary and fiscal measures across the globe and are willing to look beyond the pandemic. It is always difficult to predict the market movements in the short-term, given the expected market volatility.
Pharmaceuticals, IT, and telecom sectors look positive. However, the media, oil and gas, financials, hospitality and construction sectors are underweight. As long-term investors, the focus is on evaluating businesses for their ability to sustain challenging times and invest for future growth at a higher return on capital employed (RoCE).
The decline in earnings is expected in FY21 as businesses limp back to normalcy with intermittent lockdowns and partial opening up of the economy, in a scenario where the infection is still spreading.
Small-caps have remained relatively volatile, while the valuation differential between mid-caps and large-caps has since normalized. Across the market cap, some companies generate consistent cash flows and high returns on capital. Opportunities in such companies are high, as well as in companies where there can be an improvement in the profile of return ratios. These opportunities are more bottom-up, rather than sector or market cap-specific.
Most MNCs focus on their core operations and avoid capital allocation to non-core areas. Typically, they deepen their presence with quality offerings supported by strong branding. They are more likely to consolidate their market position with the help of strong financials and gain market share from weak players.
Investments in MNCs are made with strong entry barriers as such companies possess durable competitive advantages that often lead to the long runway for growth. Relative valuations are expected in the context of quality of the businesses, cash-flow generation, high return ratios, and zero debt on books, as against the same parameters for non-MNC broad market indices. While MNCs are trading at relatively premium valuations, their return on equity (RoE) and RoCE are significantly higher. The near-term valuations for MNCs are at the higher-end of their historical range.