ETMarkets Fund Manager Talk: SVB-like events more smoke than fire, no fundamental impact on India: Vikas Gupta

Returns on equities are never linear. But given the market behaviour over the last 6 odd months, how are you reading it and how long do you expect this volatility to stay?
To understand the current bout of market volatility, we have to look at the US. We think that the SVB Bank and Signature Bank collapse and the subsequent action by the FDIC, The Treasury and the Fed has brought the focus on maintaining financial stability.

It is clear that the Fed rate hikes are working, with both, positive and negative consequences. CPI going down is the positive and SVB and other US banks facing asset-liability mismatches is negative.

Of course, the banks are to be blamed, not the Fed, for their irresponsible behaviour of financing long-dated assets with short-dated liabilities in a rising interest rate environment.

However, this has put the financial stability maintenance mandate back on top of the agenda and even above managing inflation.

So the March meeting of the Fed is likely to be -25 bps to +25 bps, with significant measures to increase liquidity temporarily to bring the US banks’ asset-liability mismatches in line through these measures within, say, 6 months.

This means a more dovish Fed and, hence, we expect markets to be optimistic in the base scenario with high probability. Of course, some probability exists of things going out of control at some bank or other financial market player and causing significant risk; but we think that is a low likelihood scenario.

Do you see any impact of the SVB crisis on India or the Indian banking system?
Absolutely not. To our knowledge, there is hardly any interlinkage between Indian banks and SVB. Also, the Indian banks’ asset-liabilities are quite matched compared to the skewness within the US banks’ balance sheets.

Also, the lending is quite prudent and balance sheets are quite clean.

We think such events, with more smoke than fire, associated with negative market sentiments but no real fundamental driver for India, create opportunities for investors.

Given the global and domestic risks ahead, how should one seek alpha in this market?
As always, as scientific investors, we love it when market sentiment is negative while the long-term fundamentals of many “SuperNormal Companies” remain intact.

When such companies are available at “SuperNormal Prices”, meaning, large discounts to their intrinsic values due to market sentiment, we love it.

The alpha is locked in with a portfolio of high growth, wide moat companies bought at a large discount to their fair values.

Risks to be careful of are to avoid highly leveraged companies, however cheap they may look or however high growth they may be.

Also, avoid extremely overvalued companies indicated by P/E ratios of 50+ or PBV of 10+ etc. Of course, in some cases these are justified due to temporarily low earnings or large buybacks etc., respectively. However, leave that for the experts to figure out.

Keep in mind that alpha is locked in when there is uncertainty; but is manifested when certainty emerges.

The Nifty 50 is currently trading at 20x its trailing valuations for FY23. Which sectors or pockets look attractive and offer buying opportunities?
Yes, one could generate alpha for the long-term just by investing in Nifty itself at current values. However, imagine the opportunities available today if one were to dig a little deeper?

We are quite positive on growth vectors in India such as defence, railways, power (Generating companies, financing companies, transmission and trading infrastructure, etc.), FinTech, digital banking and payments, capital enablers, future of mobility, and above all, the AI-Revolution, Digital Transformation and the Metaverse.

For the global growth vectors such as the AI Revolution one has to invest directly in the US companies and we have such a portfolio.

How has your smallcase performed in the last 1 year? What were the major entry and exits in the portfolio?
We have more than a dozen small cases and 3 are in the top 10, 2 in the next 10 and 1 in the next 10, meaning 6 in the top 30 on a one-year performance basis among more than 500 smallcases.

Our Omni Bharat Defence, Omni Bullet Train and Omni Super Dividends are the top 3 within our small cases for the last 1 year. We have hardly exited anything, but have added several more stocks where we found opportunities due to the market downturn.

We have seen that both SEBI and exchanges have been cautioning investors on fraud and dubious practices on investment advisory by some entities. What is your readthrough and how should retail investors handle such instances?
Unregistered financial advisers who are not accountable to anyone pose a threat to the whole financial services ecosystem by luring unsophisticated investors into loss-making transactions, thus tarring the reputation of the capital markets.

These people lure them into crypto currencies, forex trading, F&O and even cash-market trading on penny stocks or tips etc. All of these are disastrous to the wealth of investors.

But beyond that it creates an image in their minds of stock markets as casinos which is harmful in developing a constructive equity investment culture.

When a so-called adviser “guarantees” returns or says there are no risks, one should be very careful to run away from such advisers. Also, anyone discussing returns which are much higher than the long-term Nifty returns should be able to explain the source of such returns. Otherwise, the retail investor should run away from them.

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