Stock markets the world over faced jitters in February, initially due to concerns about interest rate hikes, volatility in crude, and uncertainty regarding geo-political tensions between Russia and Ukraine, which ultimately resulted in a full-fledged war when Russia invaded Ukraine on February 24 and caused the biggest single-day crash of CY22 so far.
Bears seemed to be steadily gaining control of market sentiment as the benchmark Nifty50 declined by 3.15 percent during the month. All the broader indices lost ground and towed the lines of the benchmarks with the Nifty Midcap and Nifty Smallcap indices losing 6.8 and 11.4 percent, respectively. The BSE 500 declined by 4.11 percent while the BSE Smallcap tanked 8.77 percent.
“Despite such a significant fall in mid- and smallcap indices, their valuations are still higher compared to their long-term averages. Mid- and smallcap valuations are at 1.1X of the Nifty's valuation, while their 10-year average stands at 0.8X.” said Vinit Bolinjkar, Head of Research, Ventura Securities Ltd.
From achieving their all-time highs in October 2021, markets have corrected significantly with the Nifty50 plummeting 14 percent. Midcaps and smallcaps also under-performed as they have corrected about 18 percent and 19 percent from their highs of October.
DIIs fill the FII void
Foreign institutional investors (FII) have so far pulled out over Rs 1.13 lakh crore from equities in India till date in CY2022. However, the silver lining is that domestic institutional investors (DII) did their bit as they absorbed almost 84 percent of these FII outflows. The domestic institutions have net bought approximately Rs 94,342 crore into the markets so far in CY2022.
“If we look at the FII/DII figures from April 2021 to March 2022 YTD, the DIIs have almost tried to absorb the net selling of Rs 2.13 lakh crore of FIIs by net buying to the tune of Rs 2.12 lakh crore in the Indian equities market. Hence, giving some comfort over the liquidity front,” said Sudeep Shah, Deputy Vice President -- Technical & Derivatives Research, SBI Securities.
Experts have been advising caution on markets for quite some time and have been indicating that FII flows in India will remain volatile.
“In the past couple of months, we have cautioned investors on the possibility of a meaningful correction in the broader market. And consequently, the need to reduce exposure to the smallcap segment, especially momentum and speculative stocks,” said Gaurav Dua, Head =- Capital Market Strategy, Sharekhan by BNP Paribas.
The India Volatility Index (VIX), which measures the expected market volatility, is currently placed in the 25-26 zone. “The volatility index indicates a higher volatility regime and choppiness will continue. However, any cool-off below 20 levels may lead to drop in volatility,” added Shah.
The standouts
Despite the steady stream of negative news, FII outflows, and other uncertainties that increased volatility and caused bearishness, there were many portfolio management service (PMS) schemes from the broader markets that outperformed the Nifty and the Sensex and generated better returns last month.
PMS schemes cater to wealthy investors with portfolio sizes exceeding Rs 50 lakh. Their professional fee structure is different from that of regular mutual funds.
Out of the 274 schemes tracked by pmsbazaar.com in February, 57 schemes (21 percent of the total) generated better returns than the Nifty, the data shows. There were 8 schemes (3 percent) that generated positive returns for the month.
Leading the pack was Scient Capital – Aries Mid Yield (+2.61 percent), Oro Asset Management – All Weather Portfolio (+1.05 percent), Counter Cyclical Investment Pvt Ltd – Long Term Value Investing (+0.89 percent), Karvy Capital – Excel (+0.81 percent) and Karvy Capital – Demeter (+0.71 percent).
Not all of these top schemes disclosed their stock holdings for February. Moneycontrol has collated a list of the top five from among those that have disclosed their holdings.
This list may give investors an idea about which stocks the fund managers of these schemes bet on. But they should not be considered ‘buy’ recommendations as every fund manager has his own investment strategy.
Counter Cyclical Investment Pvt Ltd – Long Term Value Investing
Focusing on Mid and Smallcaps, this scheme generated 0.89 percent returns for its investors in February. Its top 5 holdings were Ambika Cotton Mills Ltd, Orient Bell Ltd, Garware Hitech Films Ltd, Allcargo Logistics Ltd, and Apollo Sindoori Hotels Ltd.
Invasset LLP – Growth Pro Max Fund
This scheme focused on multicap stocks to generate 0.09 percent returns last month for its investors. Its top investments include CG Power & Industrial Solutions Ltd, KPR Mill Ltd, Mirza International Ltd, Nahar Poly Films Ltd and Polyplex Corporation Ltd.
NJ Asset Management – Dynamic ETF Allocation Portfolio Conservative
It generated returns of a negative 0.19 percent during February by focussing on multi-cap funds like Kotak Money Market Scheme Direct – Gr, Nippon India Arbitrage Fund – Direct Plan Gr, Axis Short Term Fund – Direct Plan – Gr, Nippon India ETF Junior Bees and Nippon India ETF Nifty Bees.
Acepro Advisors – Galaxy Strategy
This multicap focussed scheme generated returns of a negative 0.22 percent in February. Its top picks were TV18 Broadcast Ltd, Godrej Consumer Products Ltd, Gujarat Pipavav Port Ltd, Nippon Life India Asset Management Ltd, and Bharti Airtel Ltd
Sykes & Rays Equities – SRE Shield
The scheme focussed on large and midcaps to generate returns of a negative 0.32 percent last month. It invested its funds in Persistent Systems, Reliance Industries Ltd, Tata Motors DVR, Page Industries Ltd and Bosch Ltd.
The Outlook
Almost all the experts Moneycontrol spoke to are of the opinion that in the medium term, the market is expected to remain volatile due to uncertainty about the resolution of the Russo-Ukraine war, input cost inflation, the possibility of rate hikes and a subdued demand scenario.
“Volatility will continue to be on the higher side before we conclude a concrete market direction. It is likely to go down and settle below the long-term average as soon as we enter into a rate-hike cycle and the trajectory for the actual number of rate hikes projected for 2022 will be known to the market,” said Neeraj Chadawar, Head -- Quantitative Equity Research, Axis Securities. He expects the second half of 2022 to be more stable compared to the first half.
Quality matters and fundamentals come to the fore in the volatile phase and thus it is prudent to be cautious on low-quality stocks in the broader market in the medium term. “Going by past experience, the damage in the broader market can be extensive and correction in some stocks in the small-cap space can continue for a prolonged period,” added Dua from Sharekhan by BNP Paribas. “On the other hand, we believe that the current volatility is an opportunity to accumulate quality largecap and select midcap companies.”
In terms of portfolio strategy, Dua prefers domestic cyclicals on the back of an expected multi-year economic upcycle in India.
The Russia-Ukraine crisis has escalated commodity prices as Russia is a big exporter of metals and minerals. “It has significantly impacted the profitability outlook for cement, capital goods, high & low discretionary consumer durables, FMCG, logistics and the paints/adhesive sectors, while it will have a positive impact on the operating profitability of oil & gas and metal stocks,” added Bolinjkar of Ventura Securities.
Divam Sharma, Co-founder of Green Portfolio, suggests that investors allocate capital to largecaps and selectively to midcaps and smallcaps. “The largecaps are better equipped to weather macro challenges with uncertainties around sourcing inputs, inflation, demand, and the rising cost of funds. These stocks will be less volatile in the current circumstances,” he added.
Sharma also finds midcaps and smallcaps attractive on valuations and advises selective discretion considering business moats, the ability to pass on rising costs, low debt, tailwinds on PLI and China plus one, and management’s track.
“Given multiple headwinds like the US fed monetary tightening, ongoing geo-political issues, rising inflation, elevated crude oil prices, etc. we have been suggesting our clients focus on largecap quality companies available at reasonable valuation,” said Shrikant Chouhan, Head of Equity Research (Retail), Kotak Securities Ltd, while concurring with others.
Further, Chouhan is of the opinion that investors with a big risk appetite can focus on multicap funds or a mix of quality largecap and midcap stocks.
Disclaimer: The views and investment tips of investment 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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