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DAILY VOICE | Indian investor can start with allocation of 5-10% to global markets: Vikas Gupta of OmniScience Capital

Always keep in mind that all the risk management practices which one uses to manage their Indian listed equities portfolio apply for the global portfolio as well.

August 27, 2020 / 07:57 AM IST

An experienced Indian investor can start with as low as 5-10 percent of their portfolio for risky assets and as he or she develops comfort can go up to around 25-30 percent or more, Dr Vikas V Gupta, CEO & Chief Investment Strategist, OmniScience Capital, said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpts:

Q) Global diversification is the theme that has picked up momentum in the week gone with 3 brokerage firms announcing that their platform is streamlined to invest in US markets. What is the kind of percentage one should allocate globally?

A) Assuming you are already invested in Indian markets, have the risk-taking ability, and have experience of investing in equities and other listed securities – in that case, you can start allocating to global markets.

If someone was based out of London, New York, Singapore, or Dubai, they might have invested nearly 80-100% in the US or other developed markets and only around 5-20% would be in the Indian markets.

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However, an experienced Indian investor can start with as low as 5-10% of their risky assets bucket and as he or she develops comfort can go up to around 25%-30% or more.

Always keep in mind that all the risk management practices which one uses to manage their Indian listed equities portfolio apply for the global portfolio as well.

This means that do not invest in individual stocks that catch your fancy without understanding the business model of the company and its intrinsic value as compared to its market price.

Also, always invest on a portfolio basis with around 20-30 names with 3% to 5% weight. One can look at our Scientific Investing philosophy and framework to guide the investment process.

Q) What are the risks that one should be aware of when it comes to global diversification?

A) Even in global markets, the same equity risks have to be considered, such as, weak business operations & balance sheets, poor capital allocation, and overvaluation.

When Indian investors think about global investing they tend to paint all the countries with the same brush and focusing on factors such as “oh this market looks cheap on PE basis” or that market has high growth rates, so let me invest there.

However, one should be aware that each country poses very specific risks, and first times investors should keep completely away from other emerging markets, such as China, Russia, Brazil etc.

Even the majority of the most sophisticated global investors focus on developed markets, primarily, the US and only after a significant allocation there, move on to markets in EU and UK. This is because of the stringent regulations and scrutiny of the financial markets in these countries.

Reading and understanding the balance sheets and financial statements also require an understanding of their accounting standards which might treat several line items differently compared to Indian GAAP. All other equity market risks continue to apply.

Q) Apple $2trn Mcap is the equivalent of Mcap of BSE listed companies. This is massive wealth creation by any company. What are your views? Do you think any Indian company would climb to such a height in the near future?

A) Yes, there is no doubt that it is a massive wealth creator, and some people confuse this with a bubble. In Apple’s case, there is massive wealth creation in fundamental terms of revenues, profits, and cash flows.

Apple’s market cap of $2 trillion is backed by a revenue of $273 billion and free cash flow of $70+ billion. This is higher than the total earnings of the listed Indian universe which are only $40 billion because of numerous loss-making companies.

This is an FCF margin (similar to net margin) of more than 25% and a PCF (similar to PE) of 28. (We discuss cash flows instead of earnings for US companies since there are a lot of non-recurring, non-cash expenses on the books which make the earnings of different periods less comparable.).

In our opinion, Apple offers a superior investment opportunity in terms of valuations, with a globally dominant moat—what we call a supernormal company—compared to many Indian companies which are considered moat companies, but are available at PE ratios of 50 to 150.

The only comparable Indian companies are Reliance Industries and TCS. With the kind of growth plans that Reliance Jio has announced and other growth vectors of Reliance Industries, if all goes as per plan, they could be looking at Enterprise Values in the trillion-dollar range.

However, all this depends on a lot of things working out in the future as per plan and profitability. If TCS goes on an aggressive roll-up M&A spree and continues its organic growth plans with aggression, they are the only one that can come close to this range in the near future. But all this doesn’t look easy or quick.

Currently, we own Apple and TCS and are closely monitoring Reliance Industries but do not have significant exposure except in a few large-cap portfolios.

Q) Small & Midcaps are on the cusp of rerating that’s what a Morgan Stanley report highlighted. What is working in favour of the broader markets?

A) The valuations of some of small and midcaps had fallen significantly over the last 2-3 years. The market had polarized into a handful of extremely overvalued, mostly, consumption-oriented, popular stocks and the rest of the market was divided into capital destroyers and eroders which were rightfully cheap.

Many companies with strong balance sheets, persistent advantages but ignored by the market due to less familiarity, inaccurate analysis & misguided perceptions which were at significant discounts to their intrinsic values.

There are two different actions driving the potential rerating. The March downturn in the market caused a few sophisticated fund managers or investors to do a fresh search across markets to find new opportunities.

These ended up driving the rebound in the stocks with strong balance sheets and strong growth opportunities but mispriced, which we alluded to above.

The second driver was the unleashing of the liquidity by central banks. This caused a large segment of investors to allocate blindly to a lot of capital destroyers and capital eroders.

We think that the rally in these destroyers and eroders will fizzle out while the former set which was ignored before the downturn will continue getting rerated.

Q) What is your view on the packaging, multiplex space? It has been buzzing for some time now? The other theme which is gaining momentum is Utilities especially after the PM address on Independence Day.  

A) COVID-19 has forced a lot of consumers to get habituated to ecommerce. This trend is probably driving the packaging space. The multiplex space is probably rebounding based on expectations of the lockdown being reversed and things getting normalized.

However, we would be cautious since multiplexes are likely to continue facing challenges because of the viewers getting used to OTT platforms, except for big-budget movies with significant special effects.

We don’t own stocks in this space in India. However, we own OTT-related stocks in the US markets.

The economy coming back to normal and the move towards Atmanirbhar Bharat, Make in India, and the global need to rearchitect the supply chains away from China with a focus on India are probably the themes which were picked up by the market from the PM address on Independence Day.

This bodes well for Utilities in the long run with large growth opportunities opening up.

Q) Most policies announced by the government are primarily focused on the rural theme. Which are the sectors or stocks by which one can participate in this theme and make a ‘Bharat-centric’ portfolio?

A) In fact, our India multi-cap portfolio is full of such opportunities for an Atmanirbhar Bharat Portfolio. There are railway EPC stocks benefiting from capex in railway infrastructure.

There are NBFCs in the power finance space which are likely to benefit from the rural electrification and electricity for all themes.

There are affordable housing finance companies that are focused on financing low-income housing which could benefit from Housing for All theme.

There are two-wheeler companies that benefit from demand and affluence in rural regions. These are, primarily, exposed to the Bharat theme.

Q) We are trading at high valuations – US markets have touched record highs. Do you think we have touched an intermediate top – what is your call on equities for the short term?

A) Contrary to popular perception, the US market is not trading at high valuations. The US markets are trading at a PE of 22 for S&P 500 vs. a PE of 30 for Nifty 50 based on the index factsheets.

So the US markets are still fairly valued and cheaper compared to the Indian markets. On a Price to Cashflow basis the S&P 500 is at 20 while Sensex has negative cash flow.

Definitely there can be pockets of irrational exuberance in both US and Indian markets. So, ETF or index investing is probably not a good idea, but being selective and creating a well-researched active portfolio using scientific investing principles is probably the need of the hour.

A major event we would look out for is the US elections. But, that should not freeze an investor into inaction. Rather, one should start researching and allocating and can also be prepared for adding a chunk around the US elections, either before or after if there a correction in the short-term.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Kshitij Anand is the Editor Markets at Moneycontrol.

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