ETMarkets Fund Manager Talk: Buying growth sector stocks, low-risk ETFs is this smallcase manager’s investment tip for 2023

Edited excerpts:

As 2022 draws to a close, how has your smallcase performed this year?
We offer three smallcases designed for different market conditions. The ‘core portfolio’ smallcase, focused on defensive stocks with stable growth and a high margin of safety, outperformed the benchmark by 13% YTD.

The ‘sector advantage’ smallcase, which invests in strong companies in uptrending sectors, outperformed the benchmark by 12.45%. The ‘momentum portfolio’ smallcase, which invests in uptrending stocks, outperformed the benchmark by 6%. The three portfolios are designed to take advantage of the market’s oscillation between bear and bull markets.

They are structured to invest in different types of securities depending on where the market is on the spectrum, in order to potentially maximize returns for investors.

The ‘core portfolio’ is ideal for a bear market while the ‘momentum portfolio’ is ideal for bull markets.

Which were the new sectors and stocks you entered in this year and why?
During the beginning of the year, we invested in companies that would benefit from India’s commodity growth by adding , a dominant player in India’s refractory market and took advantage of value investing opportunities during a supply chain crisis in Europe.

We also added defense companies with no debt and low price-to-earnings ratios like , , and Bharat Electronics after the first quarter of the fiscal year. We remain bullish on banks like , and due to their cleaned-up balance sheets and ability to deploy capital at higher rates.

Which are the sectors that you would want to look at next year for an investment opportunity?
We are optimistic about the potential performance of City Union Bank in banking, SJS in the auto ancillary industry along with their sectors, and the MAFANG ETF in 2023. These sectors have several potential triggers that could drive their performance, such as the cooling down of US Fed’s interest rate policies, resolution of the supply chain crisis in Europe and India growing as a major investment destination.

City Union is a well-established bank with a small market capitalization of Rs 13,000 crore and high operational efficiency.

SJS is a leading player in the domestic “decorative and aesthetics” business, with a track record of strong 30% operating margin and a debt-free balance sheet. It is trading at a 25x valuation and has a market capitalization of Rs 1,460 crore.

How is 2023 looking up for the retail investor community?
Do you think it could turn
out to be better than 2022?

Improved access to market information and technology has led to increased retail involvement in investing and improved investing skills.

While markets have experienced downturns in 2022 due to a variety of factors, it is possible that 2023 may see much better performance as certain challenges such as the COVID-19 scare in China, rate increases by the Federal Reserve, and issues in Europe are resolved.

Retail investors who have maintained their systematic investment plans (SIPs) may be rewarded in the coming year.

If an investor today wants to invest Rs 10 lakhs, what is the kind of portfolio you would recommend him/her for 2023?
The market in India may experience a bull rally in 2023, with foreign institutional investors potentially being active buyers.

To maximize potential returns while minimizing risk, it is advisable to consider stocks with a high margin of safety, low earnings multiples, stable business growth, low float, and decent growth, which is what we offer through our CORE smallcase.

Alternatively, a portfolio of strong stocks across key sectors like our sector advantage smallcase or low-risk equity ETFs may also be good options.

It is important for investors to consider their investment goals and risk tolerance before making any decisions.

Many
smallcase and PMS funds had reduced exposure to export-oriented sectors such as IT this year. Given the recession fears in the US and Europe, will they remain out of favour or would you buy the dip?

The Federal Reserve’s rate hikes have negatively impacted the present value of future cash flows for IT companies, leading many PMS funds and smallcase firms to reduce their exposure to this sector.

However, reducing exposure may not be a long-term viable strategy. We do like a few IT and export oriented companies like

and .

Alternatively, investing in an ETF such as MAFANG, which invests in the top 10 NASDAQ companies, may be a way to take advantage of potential interest rate decreases.

The public sector space did really well in 2022, particularly rail PSUs. In the run-up to the Union Budget, would you recommend adding any stocks despite the run-up we have seen?

Railway PSUs have performed well in recent months, but at these levels, it is important to carefully consider their valuation, which is not comforting for me.

Alternatively, defence-oriented companies such as Mazagon Dock,

, and are good options to consider.

These companies are debt-free and have near-monopoly positions, which make them attractive investments.

As India grows to be an exporter of defence equipment, I will not be surprised to see positive triggers for this sector in the Union Budget.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)