Quality companies would usually be defined as those that have good operating efficiency, sustainability of profits (not too many one offs), and high return ratios (both absolute and compared to others in its industry) etc., Rajat Jain, Chief Investment Officer, Principal Asset Management, said in an interview with Moneycontrol’s Kshitij Anand.
Edited excerpts:
Q) US Fed plans to keep interest rates low for a long time. What is the kind of impact it will have on emerging markets like India as well as the currency?
A) We have seen a very aggressive monetary response from the central banks in this crisis, with larger support in terms of the number of funds coming in a very short period of time.
Qualitatively also, the intervention has been different this time around as the central banks have bought a wider range of assets including corporate bonds.
In addition, there has also been substantial fiscal support from the governments. The impact of this support is that it has reduced liquidity and systemic risks and reduced tail risk for investors.
The global financial conditions remain easy and are likely to be so in the foreseeable future. The Fed’s interest rate path indicates that policy rates are likely to be on hold till 2023 at least.
Easy financial conditions are usually good for risk assets, but there could be interim volatility in the markets due to news flow on events like the US-China standoff, the steps governments take to bring down their fiscal deficits, renewed cases of COVID, etc.
The Indian Rupee has, for long periods has had a steady 4-5% annual depreciation against the global currencies, as Indian inflation has traditionally been higher. We expect that to continue.
Q) One space that will remain popular even if Sensex, and Nifty falls and that would be large-cap. Do you think the smart money or has it already started rotating towards quality large-cap? Any stocks that are on your radar?
A) Large Caps account for 75%+ of the overall market capitalisation of Indian markets. For the Indian markets to do well, the large caps have to do well, as they are the companies most geared to the improvement in the economy, dominate their industry or niche, usually have a key advantage or a moat around their operations, and can absorb capital flows given their liquidity and size.
The Nifty, which is a representative of the large-cap stocks, has done well and is up nearly 48 percent till date (September 21) since the rally began on March 25.
I think the smart money would have exposure to Large Caps, though the composition of the portfolio could change over time.
Q) So we keep on talking about quality, how does one define quality in large-cap space?
A) Quality companies would usually be defined as those which have good operating efficiency, sustainability of profits (not too many one-offs), high return ratios (both absolute and compared to others in its industry), generate free cash flow, have moderate debt, and who generally deal fairly with minority shareholders.
Q) It looks like it is raining IPOs --- we saw bumper responses for both Route Mobile as well as Happiest Minds. There are many more IPOs lined up such as Angel Broking, CAMS etc. Does it look like the lull of IPOs is ending? What are your views? Any IPO which you are particularly excited about?
A) The market has been discriminating and has rewarded well-run companies both in the secondary market and in the primary market.
The IPOs which have hit the markets have done well as they came from good companies and their valuations were such that they left something on the table for the investors.
The success of IPOs is positive in that it creates incentives for fresh funds for capital creation. However, one should be watchful and should be careful about the markets when IPOs from poor quality names also are doing well.
Q) Market seems to be walking on a tight rose as geopolitical concerns as well as COVID-19 cases are not coming down, but yes there is some hope of a vaccine but that too is still some months away. Are we nearing the peak – we could have a touch and go moment with 12K and then fall?
A) The markets over the last 6 months have gone up quite sharply, and valuation in certain pockets of the market are looking elevated.
A correction in the markets is always a possibility, but the important point is what comes next. Will the correction be deep and prolonged? We think that is unlikely.
Hence, it may be a good idea to stagger one’s investments and take advantage of any corrections that may arise, during volatile market conditions.
We believe there are good investment opportunities in a select set of companies that have less leverage, a strong balance sheet, steady and robust business models, businesses with low competitive intensity, and above all good management.
Q) The 50% rally in the Sensex, and Nifty was largely led by roughly 10 stocks while the rest of the market suffered and that is why there was no jubilation among the investment community. Now, when the tide reverses could these stocks face selling pressure and investors should at best book profits? What are your views?
A) I actually don’t agree with this analysis. As I said earlier, the Nifty is up 48% till date (September 21) since the rally began on March 25. In this period, probably 25 stocks have risen 48% or more. Only a few stocks are down.
Hence, it is a broad-based rally with stocks across pharmaceuticals, autos, staples, financials, IT, metals, media, and other sectors doing well.
Yes, it is true that the index movement has been driven by the heavyweights because they dominate the index, but a much wider set of companies has done well too.
So, one needs to look at the individual stocks and not only look at the index.Finally, another way to look at the data is that over this period, the Nifty 100 equal weight index (where every stock is equally weighted) has done slightly better than the Nifty 50 (which is market-cap-weighted). This shows that a range of stocks have done well, and not only the heavyweights.
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.
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