The most important lesson, though not new, is to focus on the long term while selecting stocks, and it is important to stay with ‘Quality’ stocks and managements to create sustainable long-term wealth, Gautam Duggad, Head of Research – Motilal Oswal Institutional Equities said in an interview with Moneycontrol’s Kshitij Anand.
Edited excerpts:Q) Bulls roar on D-Street thanks to the massive liquidity from foreign investors. What is fuelling the appetite for Indian markets – is it the MSCI inclusion, green shoots in the economy, overhang of US Presidential elections getting over or expectations of a stimulus package?
A) It's a combination of things. Sharp rebound in macro indicators, improved situation on COVID (net active cases down 50% in two months), big beat on 2QFY21 corporate earnings, and improved management commentaries on demand.
Stimulus announcement plus some of the long-term policy reforms like Labor laws, Agri reforms, and PLI initiatives are also adding to the buoyancy.Q) We are approaching the last month of the calendar year 2020. Any lessons which you would like to share with your readers?
A) Firstly, the most important lesson, though not new, is to focus on long-term while doing the stock selection. Second, it is important to stay with ‘Quality’ stocks and managements to create sustainable long-term wealth.
And, lastly, the important lesson is to emphasize or to give equal if not more importance to balance sheets and cash-flows than one gives to P&L. Remaining flexible in portfolio construction is equally crucial.Q) Lakshmi Vilas Bank left a sour taste for both equity and bond investors. How can investors avoid these pitfalls? Any thumb rules which one should follow?
A) Simple thumb rule to follow when investing in any stock and more specifically in a Banking stock is to ensure the following check-list:  Long term track record of wealth-creation  Liability franchise and capitalsiation levels  Consistent delivery of superior RoE’s  Decent long term delivery of earnings CAGR  Under-writing standards  Healthy asset quality track record and  Most importantly, the QUALITY of management.
Q) India Inc. reported a stellar set of September quarter earnings where there were more upgrades than downgrades. Optimistic management commentary also lifted the sentiment. What is the growth outlook you foresee for FY21 and FY22 and is the Street discounting the same?
A) Yes 2QFY21 earnings were the best in the recent times with a 17% Nifty profit growth vs. our expectations of 6% decline. The beat was quite broad-based with almost all sectors barring capital goods and telecom beating our estimates.
The upgrade to downgrade ratio in our universe was 4:1. We have upgraded Nifty EPS estimates by 9% for FY21. We now expect FY21 earnings to grow at 9% for Nifty and close to 30% in FY22.
After the sharp run-up in markets, lot of the expected earnings recovery is now discounted by the market.
Q) How should one pick stocks in the current environment when benchmark indices are gunning for new highs almost on a daily basis? The valuations now look stretched and even the m-cap to GDP ratio is hovering above the historical averages?
A) One should pick stocks where earnings visibility is high, balance sheet quality is robust and long-term earnings trajectory remains healthy. COVID has accelerated the shift from unorganized to organized segment.
So leaders in various categories can continue to benefit and corner more market-share/profit pool. Yes, valuations are no longer inexpensive, so investors should embed that in their expected returns in the near term.
Q) What is your view on the small & midcap space which sizzled so far in 2020 after 2 years of underperformance? Will the momentum continue in 2021?
A) It will be a function of earnings delivery. If economic recovery gets broad-based and spread into multiple sectors, then the probability of mid-cap/small-cap outperforming large-caps goes up.
This is what we saw in multiple cycles in the past and it shouldn’t be any different this time either.
Q) What should be the ideal investment strategy if someone wants to put fresh money – wait for a dip, or buy at current levels? And how should one plan the asset allocation say he/she is in the age of +30 years?
A) One shouldn’t time the market. Use systematic investment plans if you don’t have expertise in direct stock selection and put money consistently over the long term.
If you are doing direct equity investments, then put the money which you don’t need in the short term into equities. Diversify it into multiple sectors and have a bias for companies which are leaders in respective sector/categories with a well-demonstrated track record of earnings growth and high-quality balance sheets.
Patience and long term orientation are two critical ingredients for superior wealth creation in my view. As far as asset allocation is concerned, I believe having a disciplined approach with regard for personal circumstances is very important, as in the long-term asset allocation is far more important in creating wealth.
Well balanced allocation across equities, bonds, gold, and real estate with bias towards equities for younger people is what I would recommend.Disclaimer
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