Curtailing first mover advantage may cause some panic: Feroze Azeez on SEBI advisory to MFs

SEBI's stance revolves around the need to temper the influx into small-cap funds. This caution stems from the concern that the Indian capital markets may not possess adequate research and depth to absorb the substantial inflow of funds that could potentially come from Indian households. With Indian households holding significant financial assets, estimated at 740 lakh crores, and mutual funds accounting for only 24 lakh crores, there's a considerable gap that could lead to an overwhelming surge of capital into the market.

This influx, primarily from domestic institutions, has already resulted in notable increases in specific stocks. For instance, in the case of Zomato, mutual funds added 52 crore shares, contributing to a significant market cap surge. This trend, where 28 out of 34 stocks that tripled in value this financial year experienced mutual fund shareholding increases, underscores a correlation that SEBI is keenly observing.

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The advisory from SEBI indicates a proactive approach aimed at reducing market volatility and ensuring a positive investing experience for all stakeholders, particularly new investors. Moreover, exchanges like NSE are also adapting to this shift by transitioning to a free float-based methodology for stock selection, highlighting the growing importance of free float as a key metric in market indices.

How can mutual funds ensure that investors who redeem first don't put investors who are staying back at risk?
I'm very intrigued to see the responses from asset management companies regarding curtailing the first mover advantage. This could potentially damage investor sentiment because those who invested in small-cap funds a couple of years ago did so with certain expectations regarding accessibility of their funds within a few days.

Any mid-course rule changes could significantly impact sentiment, especially if there are exit loads or perceived restrictions, leading to concerns about accessing invested funds. This situation might not necessarily result in a run on the fund, but there could be some degree of panic among investors. I'm keen to observe how this unfolds.

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Are you constructive on IT? CLSA has recently downgraded some largecap stocks saying weak growth outlook for 2024 has still not been factored into valuations.

From a short-term perspective, disregarding a couple of quarters in a particular sector is quite commonplace. When making sector calls, especially through a mutual fund platform, if one does so, it's typically with a longer-term outlook, spanning at least 12 to 15 quarters. Patience is crucial when anticipating structural changes within an industry, even if it means enduring a few quarters of adjustment.

For instance, I identified signs of bottoming out in the IT sector last June, judging by the stocks' movements following poor results. This signaled a potentially oversold market, particularly in IT, which happens to be the second-largest sector in the NIFTY index. Considering the expected influx of both domestic and foreign investments into India, there's likely to be buoyancy in the market, especially around NIFTY levels of 22,400 and PE of 22-23x. Additionally, it's prudent to safeguard capital during election periods.

The correlation between the buoyancy of IT stocks and investment flows is evident, making them relatively safe short-term investments. Moreover, the shift towards innovation rather than generic work bodes well for long-term prospects in the sector.

Do you see opportunity in hospital stocks? They have corrected quite a bit amid regulatory concerns.

I believe regulatory changes can certainly impact the healthcare sector. However, hospitals possess significant levers and technical capabilities to navigate such regulations effectively. In countries like ours, where medical inflation is rising at a rapid rate, particularly in the upper strata that hospitals cater to, this inflation presents an opportunity for revenue growth.

A few years ago, prior to the onset of Covid-19, studies indicated a medical inflation rate of around 13-14 percent in sophisticated healthcare services for affluent individuals. This suggests that by investing in healthcare one could capitalise on this inflationary trend. While regulations may pose challenges, they could also be viewed as long-term investment opportunities.

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Does cement hold promise as a solid investment over a period of six to eight months? While there was a boost in volumes, the favourable pricing aspect was absent…

Yes, I agree with that assessment. The ongoing infrastructure investments and government commitments bode well for infrastructure and related industries. While current valuations are slightly elevated compared to historical averages, they still seem reasonable considering factors like long-term mean PEs.

Although fiscal spending in the first nine months has been lower than the long-term average, I still believe cement stocks have a place in the portfolio. When considering sectors, it's essential to weigh their presence in the Nifty index. In this regard, cement stocks should be overweight relative to the Nifty weightage.

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