Secret behind stellar performance of India's oldest, smallest quant fund

Even as profit expectations got smashed due to the pandemic, the Nippon India funds model fared better as it didn't have earnings estimates in its quantitative model.

India’s oldest equity quant fund that offered lacklustre returns for years outperformed most of its peers in 2020 amid the decade’s worst market rout. The secret lies in its investment model.

The 12-year-old Nippon India Quant fund, which is also among the nation’s smallest, dropped about 15 per cent this year, compared to a 27 per cent decline for the benchmark S&P BSE Sensex. When India shut down its economy to check the spread of coronavirus, the fund fared better than nine out of 10 equity mutual fund plans, while the sector as a whole clocked an average loss of about 19 per cent, data compiled by Bloomberg shows.

Nippon’s model places half of the emphasis on growth and quality factors while picking stocks, Ashutosh Bhargava, who manages the Rs 209 million ($2.8 million) fund said in an interview. Since the lockdown started in March, the fund had increased investments in stocks of IT firms and consumer goods makers. However, once valuations for consumer-oriented companies reached historic highs, the model dro-pped them in favour of pharmaceutical manufacturers.

Even as profit expectations got smashed due to the pandemic, the Nippon India funds model fared better as it didn’t have earnings estimates in its quantitative model, Bhargava said. Just five of the 18 Nifty 50 companies that have reported quarterly results so far this season have beaten analyst estimates.

Equity and credit markets can retest recent lows, warns Chris Wood

Over the past few weeks, Covid-19 hit, stimulus buoyed markets world over have risen close to a 'bull phase', typically defined as a rise of 20 per cent or more from the recent lows.

Equity and credit markets can go back to their recent lows, and probably slip even further if the infections caused by the coronavirus (Covid-19) pandemic do not peak out by April-end, wrote Christopher Wood, global head of equity strategy at Jefferies in GREED & fear, his weekly note to investors.

“In the unlikely case where infection rates do not peak out by the end of April, stock markets and credit markets will re-test recent lows and worse. At that point, there will be growing pressure for people to return to work because at a certain point the negative impact on the economy and people’s general livelihood becomes a bigger negative than the disease itself,” Wood said.

Over the past few weeks, Covid-19 hit, stimulus buoyed markets world over have risen close to a ‘bull phase’, typically defined as a rise of 20 per cent or more from the recent lows. The US, South Korea, Philippines and Indonesia have already entered technical bull markets, having risen over 20 per cent from their respective low levels. Indian benchmarks – the S&P BSE Sensex and the Nifty 50 – are also flirting with this territory now.

With most countries in a lockdown mode given how quickly Covid-19 has spread, Wood believes it will be tough to extend the lockdown phase beyond this quarter given the high debt levels. This, he says, is even more the case in the developing world than the developed since safety nets are not the same in the case of former to support the unemployed.

“It is hard to see the Western world locking itself down into another Great Depression. But that threat is real if the lockdowns are extended beyond this quarter because of the sheer level of outstanding debt. In this respect, it is hard to imagine that the three-week lockdown in activity ordered by Indian Prime Minister Narendra Modi on March 24 can be extended. That is assuming such a lockdown can even be implemented effectively in such a densely populated country,” Wood wrote.

IT catches Covid-19 bug: Sector's outlook takes a hit on demand concerns

Analysts expect top line pressure to reflect from Q4 itself.

Information Technology (IT) stocks, which were considered as ‘defensive’ until recently, have been under heavy pressure due to demand concerns caused by the outbreak.

The Nifty IT index has shed close to 20 per cent in a month, in line with the Nifty50. The expected earnings pressure, mainly on account of a tepid top line, is weighing on sentiment.

Analysts expect top line pressure to start reflecting from the March quarter itself, given the supply-side disruption amid the lockdown and business disruption in key markets such as the US and Europe. Besides lower billing and utilisation (lower productivity on account of travel restrictions), the disruption will also hit margins, despite a sharp depreciation in the rupee.

The major impact will be felt in H1FY21 (April-September 2020), with demand from clients expected to be sluggish. This will hurt earnings visibility for the entire FY21, given the first half is typically vital for the sector. This is when most of their clients announce their IT budgets.

Therefore, analysts at HDFC Securities have slashed their earnings estimates by up to 12 per cent for top IT players, and by a sharper (up to 28 per cent) magnitude for mid and small IT companies.

According to Sanjeev Hota, head (research) at Sharekhan: “The rapid spread of the virus has caused disruption in the supply side, and is likely to impact demand in the near term, driven by the cut in discretionary spending by clients, lower billing, and pricing pressure.”

This will impact IT firms’ financial services segment (mainly on account of lower global interest rates) and the retail sector, and consequently take a toll on overall revenue growth, as these two segments contribute 30-45 per cent to revenues of most players. Other analysts expect no growth in 2020-21 (FY21).

Eye on equity-linked debentures as volatility spikes in Indian markets

FY20 had seen increasing issuances on higher demand from issuers.

Instruments whose pay-outs depend on equity market levels are likely to be closely watched amid the carnage in global and local markets.

The Indian market saw its steepest fall in five years even as fears of coronavirus spreading continued amid a crash in crude oil prices. A price war roiled global oil markets as Saudi Arabia and Russia sparred over oil production. Saudi Arabia steeply cut oil prices and crude prices fell around 30 per cent. The S&P BSE Sensex was down 1,942 points (5.2 per cent) closing at 35,635.

Higher cost of issuing such debentures amidst such volatility is likely to weigh on issuances.

Ashish Shanker, associate director and head of investments for Motilal Oswal Wealth Management said that equity-linked debentures will become more expensive for issuers now. Higher volatility increases the price of issuing such debentures since they typically hedge their risk using derivatives. The cost of such hedging goes up when volatility increases, making it less attractive for most issuers since they tend to prefer taking derivative positions to manage their risk.

"Most people will hedge," he said.

The India VIX, a volatility index which is also known as the market’s fear gauge, surged by over a fifth on Monday.

Equity-linked debentures involve a payout which depends on market levels. This is usually achieved by investing a portion of the capital in call options. They give the investor the right but not the obligation to buy into securities at a pre-defined price.

The issuer usually writes long-dated options for the investor depending on the maturity of the instruments. The interest on the debt portion covers the invested principal over the period of the instrument. The value of the call option provides an upside boost to returns.