ETMarkets Fund Manager Talk: This smallcase manager is against “all-at-once” or “all-in-one basket” type of investing
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Over the last 6 months, how has your smallcase performed?
We have 2 portfolios on Smallcase: Flagship & Multiplier. Our ‘Flagship’ portfolio is down by 5.1% against the Nifty 500, which was down by 7% over the last months, while the ‘Multiplier’ portfolio was down by 6.2% against Nifty Smallcap 100, which was down by 7.5% over the past six months.
Are retail investors losing their patience over the volatility in the market? Are you facing redemption pressures?
We don’t believe investors are losing their patience due to the volatility in the market. However, due to the stagnancy of market performance in a range of 10-15% lower than its all-time high levels, the new investor’s entry has somewhat halted the markets, causing a fall in average daily turnover.
Hence, a fall in volumes and daily turnover makes it weak for the bulls to carry on any market momentum, causing profit booking at higher levels and market underperformance.
We are a long-term fundamental research-based portfolio advisory firm and mostly hold long-term stocks with more than a year holding period, so there is no such pressure upon us.
Have you increased cash holdings given the uncertain market environment, or are you being extremely selective in picking stocks?
Markets have been very volatile over the past one and half years and have given several thematic kinds of rallies along with corrections in played-out themes, for e.g defence sector rally, PSU banks rally, IT services rally in the new year first month, etc. Hence, rather than sitting out and holding cash, we have stayed invested as per our strategy of having 20-25% of the portfolio filled with tactical bets, which are invested for a time horizon of 3-6 months.
Do you see chances of SIP inflows cooling off in the coming months?
Yes. The rate of increase on a MoM basis has definitely slowed down from the pandemic highs, which was very much expected and known. Additionally, the decline in February could be attributed to the tax deductions we are used to seeing generally in February e.g., over the past seven years, six times, it has been an MoM decline for the February month’s SIP inflows.
How do you expect equities as an asset class to perform over the next 6 months? What are the major downside risks?
Let me first spell out the downside risks and then put forward our views on the equity markets based on those events. So the significant downside risks are:
The US Fed and ECB are hell-bent on bringing inflation down to their comfort levels of below 2%. In contrast, inflation remains sticky at much higher levels forcing the hands of these central banks to keep raising rates and causing a technical recession led by increased demand. Remember that the Great Depression of 1929-33 was led by oversupply and lesser demand. A recession in external markets and monetary tightening will impact the software exports business and merchandise exports of several chemicals and automotive exports.
Despite domestic CPI inflation within manageable levels, rising interest rates will have detrimental effects on Credit Growth rates, CAPEX funding issues, and raising bond securities. Thus, a mild halt in domestic macros will also impact consumption growth to boost.
Margins pressure across every sector. High raw material prices, revival in steel & metal prices, crude and other commodities, gold and precious metals, almost every sector is impacted due to high raw material prices, and lower margins are holding back valuations of companies, even the ones with high revenue growths.
Hence, considering these above downside risks, we believe the markets will remain volatile with sudden trend changes as per outcomes of events.
A genuinely sustainable uptrend will only follow when rate hikes stop and we witness actual growth in Corporate Profits in double digits, and that too excluding the banking sector, which has been uplifting the profit growth over the past year or so.
The SEBI and exchanges have been cautioning investors on fraud and dubious practices on investment advisory by some entities. How should retail investors filter the information reaching them?
There are various ways a retail investor could filter such information and avoid falling prey to such dubious wealth advisors:
Completely block the Telegram channels, which promise daily profit-making through Margin funded or F&O trading and charge high fees against those.
Pandemic times saw excessive growth in several digitally enabled services leading to exponential growth in those sectors, especially healthcare, crypto and technology. However, with the waning of COVID-19, businesses’ economic and financial growth is bound to normalise to sustainable levels.
Hence, any advisor guaranteeing 40-50% returns per annum from hereon should be seen with high caution in the name of Quant-based advisory models or momentums.
In the end, retail customers have to understand the risk-reward equilibrium.
While the rewards like 50-100% returns in certain asset classes with high concentration and exposure to these securities pose an equal amount of high reciprocal risk.
On the other hand, a risk-averse portfolio advisory will be able to generate much better returns against fixed-income securities mimicking the good economic growth multiplied with better rebalancing calls for booking profits and protecting capital allocation from poor-performing investments.
The Nifty 50 is currently trading at 20x its trailing valuations for FY23. Which sectors or pockets look attractive and offer buying opportunities?
Nifty trading at 20x P/E trailing valuations is very much in line with its long-term Median P/E. However, looking at respective sectors, we see most of the sector leaders trading at more than 15% below their all-time highs, which makes up a more bullish case for overall equity investments.
With a more sector-specific view, we remain bullish on the large-cap banks from both the private and PSU banking space. Chemicals, IT, cement and auto ancillary sectors look to be trading at enough discounted valuations for the long term.
Apart from these, recent corrections in the defence sector can also act as a good entry price point while tyre companies look attractive in the near to medium term.
As we enter a new financial year, how do you expect it to pan out for markets and what kind of portfolio allocation will you recommend to retail investors?
For retail investors, we first suggest understanding their risk-taking abilities as the markets may remain volatile. An all-at-once or all-in-one basket investing is not advisable. So, every retail investor should allocate a healthy sum towards fixed-income securities like FDs, RDs, bonds etc., for any unplanned emergencies and gold for times when equity markets don’t yield returns.
While allocating their investments, what should a retail investor has to consider is his/her age, understanding of the security to be invested, number of dependents and the kind of profession they are employed with, e.g., a youth in 20’s should allocate as much as in equities as they are supposed to have lesser responsibilities and hence, a higher affinity to take the risk of investments in riskier investments.
Equity inflows have so far been positive despite the market volatility, but do you expect this trend to continue unabated and why?
Equity inflows will continue unabated and rise gradually depending on the market performance. However, we cannot expect the equity inflows to reciprocate the MoM % growth levels that we witnessed during the pandemic lockdowns at any time shortly.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
