As multi-cap managers, we are more focused on identifying attractively positioned quality growth stocks. We are not there yet on small and mid-caps, and the market remains concentrated in big names or largecaps, Sunil Sharma, Chief Investment Officer, Sanctum Wealth Management, said in an interview to Moneycontrol’s Kshitij Anand.
Q) How is the external environment shaping? Though uncertainty continues over Brexit, which are the sectors that stand to gain once the deal is through?
A) There is a dichotomy today, the global economy remains in a slowdown while the Indian economy seems to be emerging from a slowdown. A Brexit deal will bring relief, however, it will temporary.
The global economy continues to be in a slowdown, with only China demonstrating any signs of bottoming. IT will certainly benefit from a Bexit deal.
We would still avoid pharma, as we believe it remains in a structurally challenging environment, particularly with respect to the US.
Q) The Nifty is up about 10% compared to last Diwali. The past one year has been a roller coaster ride for investors—record highs followed by a selloff. Can we say that testing times for investors are over, for now, or will there be pain in the new quarters?
A) We think markets are headed higher; however, we’re unwilling to state that volatility and testing times are over. While in the short-term the market is a roller coaster, in the longer term, markets have been on a steady march higher.
We’d further highlight that many funds, including our funds, are delivering returns substantially in excess of the index. Over longer periods of time, equities remain the highest yield asset class.
Q) Is Dhanteras the right time to invest in physical gold, gold MF or gold-related stocks?
A) Investors should definitely own physical gold. That is the ultimate store of value that is outside the financial system. Second, investors should also own allocation to financial gold, via gold MF.
However, in this case, we caution that the mutual fund should provide acceptable liquidity. Finally, exposure to gold-related stocks makes a lot of sense.
Some of these companies happen to be attractively valued, and we’d be buyers of these stocks. Beyond physical gold, we like gold equity because there is an underlying stream of income and therefore, the returns are more reliable and predictable.
Q) Which sectors should investors track for the next one year?
A) There are two or three key factors investors should track. First, disruptive trends which can destroy business models and reshape industries. Second, track the global economy because a global slowdown could impact India dramatically.
Sectorally, autos remains a sector to be watchful. Industrials is also a sector we’ll be tracking next year, particularly companies that provide automation technology for factory buildout.
Secondly, we’d be buyers of companies that provide infrastructure materials for manufacturing facilities.
And, finally, financial services are moving towards digital models and we’d track names to identify which companies are best positioned in the digital space.
Q) Diwali is a day when we start something new. What is your advice on portfolio management?
A) This Diwali, we are at month 21 of a correction that began January 2018. Most investors have been hit badly in this downturn. However, this is a time to believe India will rebound from the downturn.
While so many investors are focused on the index, quality stocks have delivered returns far in excess of the index. So, this Diwali, investors should review their portfolios and own quality. The fundamentals of the global economy continue to support the strong and the dominant.
This Diwali, we also believe investors should start looking at real estate. While the broader market may be in consolidation and distress, key players in the organised sector are gaining market share and those companies that have strong reputations and a strong pipeline of projects will prove to be compounders and wealth creators in the coming quarters.
Q) Largecaps had a good run in Samvat 2075, do you think that the next year, Samvat 2076, could be a low for the small & midcap space?
A) As multi-cap managers, we are more focused on identifying attractively positioned quality growth stocks. It is about the business model as well as the valuation, and not the size.
Having said that, we are not there yet on small and midcaps. The market remains concentrated in the largest names or largecap names.
Several fund managers have made pre-emptive calls on midcaps, but its largecaps that are outperforming. We prefer to let the markets dictate forward strategy.
We have now seen some signs of value emerging in the mid and small-cap space, and it is a fairly small set of names. We don’t see a compelling reason to front-run the trade.
In the coming months, should the recovery continue to unfold, midcaps will accelerate. However, we’d like to see how earnings pan out before moving to over-weight on small and mid-caps. In the meantime, we are fairly content owning quality names in the largecap space.
Q) Most of the high-debt companies were also wealth destroyers last Diwali. Where do you see the next pain points coming from?
A) We’re concerned about global demand, so we’ve been trimming our weights in information technology and remain domestic-focused in healthcare.
We don’t see a recovery yet in generic manufacturers and pharma exporters. Similarly, we’d be underweight on metals, also related to the lack of visibility on global demand.
With the government having doled out a large corporate tax cut and tax receipts underperforming, we’re also avoiding sectors dependent on government spending. We’re underweight infrastructure.
We continue to believe autos could witness pain points at the company-specific level, and disruption is likely to impact some companies materially. That’s where the largest surprises could emerge one year out.
Q) As we approach the festival season, consumption and auto companies have started rallying in anticipation. What are your views?
A) We’re heartened by the news, so far, by the consumption sector. It seems that the slowdown rhetoric has been somewhat exaggerated.
Bellwether names in the sector have reported reasonably decent numbers. Some of the kickers is coming from the corporate tax cut.
So, the prospects of improving earnings growth and improving economic fundamentals suggest that consumer companies are likely to continue rallying.
The auto sector is in a disruptive phase. Leadership names have rallied, however, time will tell whether the sector is in a recovery phase or not. There is also the overhang of electric that could disrupt names in the sector, changing buyer preferences.
Most importantly, affordability is a factor. So, the auto sector is going through upheaval and whether the old leaders are the future leaders is frankly unclear at this time.
The sector remains in the throes of disruption, so we’re fairly content to remain underweight in the sector until clarity emerges on the next set of leaders.
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