Time to take some money off IT & pharma, buy financials

Take some money off the table in the tech and pharma space and leverage it towards cyclicals and financials as that will yield good results over the next six to 12 months, says Anshul Saigal, CIO, Kotak Portfolio Management Services.

We are going through a sectoral rotation in the market. Does market leadership rest with financials or is it still with IT and pharma?
Clearly, leadership is changing quite fast. In this period, one or two months is a long enough time to change a cycle and in our judgement between now and the next six to 12 months, leadership will move back to banks and financials and also cyclicals. The reason is post Covid, after a bout of protracted underperformance, while other sectors like tech and pharma have done well, financials have been laggards. But during this period, these companies have strengthened their balance sheets by raising capital. It is also evident that the stress on the balance sheets is not as severe as was anticipated in the initial phase of the lockdown .

So better balance sheets, pent up demand, smaller banks and financial institutions contracting in terms of market share is a dream scenario for some of the bigger banks as also for cyclicals who will participate in growth between now and the next 18 months. We would say leadership is shifting back towards financials.


If Covid has acted as a big tailwind and it is going to be a propeller, won’t one be better off staying with IT and pharma because these have a natural Covid tailwind?
That tailwind is definitely there and it is evident in the commentary that most of the pharma and IT companies have given. They have given commentary for a double digit growth for at least a few quarters going ahead. But we have to keep in mind that most of these stocks have gotten rerated in anticipation of this growth and so while you are anticipating a double digit growth of 12-15%, many of the midcap names in both these sectors have gone up 50-100% over the last six odd months. Maybe there is a certain element of growth which is yet to be factored in, but would it warrant some amount of money moving out of here and into other segments which have yet not factored in that growth? I would say so.

So in order to ensure a balanced portfolio, take some money off the table in tech and pharma space and leverage it towards cyclicals and financials as that will yield good results over the next six to 12 months.

Within banks, what is looking attractive to you in the longer term?
Certain banks have raised capitals and buttressed their balance sheets. This capital will help them grow over the next two to three years and the effect of that will start becoming evident as early as the next quarter because these banks have given guidance of growth picking up on their asset side.

Also, the fears of moratorium and restructuring have been more than what has played out and hence there has been an outperformance on that aspect as well. As a result of that, there will be some correction and expectations particularly from those banks which have handled this phase well.

Third and most important, the markets have made a significant distinction between banks which have been able to communicate their strategy and follow it up with action versus those banks who have not been able to do that communication well. There are banks which have focussed more on NPA control and yet others which have focussed on growth. As long as the strategy is well communicated to the markets, those banks have been rewarded by the markets. This is not just for banks, it is the same with NBFCs as well.

What does Biden’s win in the US and Covid vaccine mean for the world and financial markets in 2021?
Biden win on its own may have not meant much but if you combine that with a Senate victory for Republicans, then it is not so bad and in fact that is a favourable scenario for the markets. As we all know, Biden’s tax reforms would have been quite adverse for the markets because they would have been adverse for business in general. Now, because the Senate is with the Republicans, he is going to find it difficult to pass those laws in the Senate and hence probably those reforms will not see the light of the day. The market believes this and the currency markets seem to be substantiating this.

The day when Biden’s victory became more evident, the Chinese Yuan strengthened. That tells you that there is a possibility that the trade aspect of the China-US relations may ease and then we could revert to a phenomenon which was playing out in the markets prior to 2016 where global trade was easier.

As for the Covid vaccine, the day we get it, will go out and watch a movie, will we want to go out and buy shoes or maybe even clothes or travel to another destination? The answer would be in the affirmative. If that is the case clearly the vaccine is going to be a big trigger for demand uptick in this country. I am in the camp that it is Covid which is going to generate animal spirits in the economy and the trigger for that will be the vaccine or just a general fatigue with Covid and people wanting to come out. Combining both these things, it seems we are in for very interesting times. Six to 18 months hence, this will look like a period of immense opportunities.

In the last couple of months, what have been your big acquisitions? Where have you taken the chips off the table?
We had an overweight in tech and we have taken some weight off tech and we have added to cyclicals; banks, even real estate, housing finance companies are the segments that we have added to and partly to autos as well.

That is the kind of shift that we have done over the last two to three months. The overarching philosophy or thought process around any action that we are taking in the portfolio is that the markets are rewarding two things; one is leadership in the category a company is in and secondly, strong balance sheets. Any shift or any addition that we are doing to the portfolio is being done keeping these aspects in mind.

Markets are at an all time high, FIIs are pumping in money -- $3-3.5 billion have come in November so far -- but DIIs are getting redemptions, why is that happening?
Yes, this dichotomy is playing out in front of our eyes and quite starkly so. It is a phenomenon where the retail investor, who after the bad experience of making no money in the last two years starting 2018, is logging out after finally making some money this year.
Secondly, since the markets have rallied so much recently, in his mind there is a disconnect between what the markets are doing and what the economy is doing and so he is taking some money off the table.

As it is, allocations to equities amongst the domestic investors were low and with each rise, the investors are taking money off the table. This is a very interesting setup because as you said, FIIs are pumping in money and there is so much liquidity globally and the interest rates are at a record low. One can easily make a case for capital to flow into equities particularly into emerging markets and then to India because India is so nicely poised.

In my experience of the last 20 years I have not seen a time when the domestic retail investor has called the market correctly. So, if he is a little wary and if he is taking money off the table, that gives me further confidence that maybe this market has further legs. One has to be cautious and one has to keep in mind all the risk parameters. In general, the psychology of the market is not one of the markets going down, it is very bearish psychology which tells you that maybe markets have more legs even from here.