Midcaps may lag largecaps, beware of ‘buzzword’ themes: Aashish Somaiyaa of WhiteOak AMC

Global cues are turning unfavourable with US yields and dollar inching higher and June rate cut bets cooling off. Do you expect global factors to play spoilsport or is a pre-election rally still on the table?

It seems to have become fashionable to say that election results are fully discounted and that budgets are like a non-event, etc, etc. Considering the statements that are coming from the leadership , it would be unwise to underestimate the impact of the upcoming elections and the impending full-year budget.

There's always anticipation surrounding such events, and markets thrive on expectations about their outcomes. Looking back over the past couple of years, it is evident that the market has remained largely range-bound, oscillating between various levels, such as 18,500, 19,000, 18,000, 16,700, and 17,700.

Despite this, there have been shifts in sectoral performance, with periods of outperformance by different segments like largecaps, smallcaps, financials, IT, PSUs, metals, commodities, and energy. Markets were navigating concerns surrounding geopolitical issues, US policy uncertainties, and domestic political landscape at that time.

However, recent developments, such as a clearer political landscape in India and a pause in US interest rates, have altered the landscape. Fundamentals have shown signs of improvement, accelerating in the last six months. Given these shifts, it appears that many have taken the market for granted. In my opinion, there is substantial upside potential in the coming months, which shouldn't be overlooked or underestimated.

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Do you believe that the recent rebound in mid- and small-cap indices indicates that the correction phase is over, or do you think there's still froth to be cleared?

I think the market will always work on relative value. As long as the economic conditions and the underlying feeling is bullish, there would be an uptrend. In that journey, it's very normal that, at certain points, certain sectors and market caps will do well. When they get stretched, people will look for where the relative value is.

For example, just a couple of months ago, I read a report from one of the leading brokerage houses that there is now value in quality. It just suggests that the market tends to rotate from something which gets expensive in favour of something which might look relatively attractive. So, as long as there is no breakdown or change in sentiment and the economic conditions remain stable, I think this bullishness would persist.

In March, while the small-cap index experienced a decline, the BSE 500 index, as a whole, remained relatively flat. This indicates that largecaps may have outperformed smallcaps during that period. Additionally, analysing the fund flows over recent months reveals that inflows predominantly originated from retail investors, high  net-worth individuals (HNIs), and domestic mutual funds.

But, if there is any pivot in US policy a couple of months down the line, you might see the colour of money change and foreign inflows may actually turn positive. So, as long as there is a bullish trend, we should all be constructive. At different points in time, different market caps or different sectors will take the lead.

Since largecaps have just about started performing well, would you advise investors to move out of mid-cap funds and increase exposure to large-cap funds?

Whenever anybody says that smallcaps and midcaps have become expensive, investors generally start assuming that there is a big crash coming in them. I don't think anybody's predicting a crash . I think the case is being made only for relative performance.

So, with that caveat, I would like to clarify that, yes, one does expect largecaps to outperform smallcaps and midcaps over the next six months. But that message is only to the extent of outperformance. So, I don't think that small and mid caps are going to crash or yield negative returns, but they could just lag largecaps.

Frankly, long-term investors should not be changing their allocation based on short-term outlooks. But yes, for those who are on the ball and managing things actively, they should, at least, look to ensure that they are not too underweight on largecaps or too overly exposed to smallcaps. Your exposure should definitely tilt more in favour of largecaps at this point because relative value is what will always rule the markets.

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What is your take on defence PSUs, given the run-up in stock prices? The popular view is that they still have meaningful upsides because of government initiatives for self-reliance and export promotion. Do you agree?

If I were to actually second-guess these kind of pronouncements, it's coming partly from two things. Over the last 2-3 years, defence has been the buzzword and has been on the top of mind because of geopolitics. On top of that, the government is looking to indigenise and invite investments for the right reasons. And the third and most appreciable thing is the way we are managing the public sector enterprises. In the past, for public sector enterprises, the buzzword was disinvestment and then privatisation.

But today, the government is using state-owned enterprises as an instrument of policy action and to drive investments in the economy. So clearly that is more constructive. So I would not disagree if somebody says that public sector enterprises and defence would be in play. You should also be mindful that there is an election coming up, followed by a big-bang budget which could put a plan in place for the next 25 years. So one can't take it lightly.

However, it's important to have a balanced perspective. So, I would also warn investors to keep in mind when something becomes a theme or a buzzword, one must exercise caution. So go stock-specific, go bottom up, but be constructive on the market. That's what I would say. As far as PSUs or state-owned enterprises are concerned, they are across sectors. So there as well, one should adopt a bottom-up approach.

How do you suggest investors should approach the real-estate sector, considering its strong performance in FY24? Would you recommend investing in individual stocks, REITs, or direct real estate purchases?

I've always been a staunch believer in real estate. Personally, I ensure that my investment portfolio includes both real estate and equity. Over the past decade, the real-estate sector has undergone significant structural changes.

I would argue that if you have faith in economic growth and corporate expansion, you cannot afford to be pessimistic about real estate. Therefore, I see long-term growth potential in real estate investments.

Of course, it's essential to be discerning about where you invest. Real Estate Investment Trusts (REITs) are an excellent option because they offer a hybrid investment vehicle. However, to make informed decisions, you need a deep understanding of the underlying asset class. Whether it's commercial properties, infrastructure like ports and highways, or other types of real estate, you must grasp the nuances of each. This includes understanding usage patterns, occupancy rates, and other factors.

For instance, if you're investing in commercial real estate-backed REITs, you should monitor trends in occupancies, project developments, and interest rates. REITs shouldn't be viewed simply as quasi-debt instruments; they are hybrids that require thorough analysis just like equity investments. But all in all, I would say that I would be constructive and again not get caught by what has been the popular belief in the last decade.

Given the recent inclusion of Indian bonds in global indices, do you recommend adding debt funds to portfolios, and if so, what percentage allocation would you advise?

Debt funds are an essential component of investment portfolios, catering to both conservative investors and those averse to the high volatility of equity markets. Additionally, individuals with short-term financial goals, such as those expected within the next year or two, typically allocate a portion of their portfolios to fixed income assets.

In the current context, particularly following the pause in US monetary policy and anticipated rate hikes, there is anticipation of a pivot in US policy. This potential shift is significant as it could alleviate pressure on our currency and external macroeconomic indicators. I think a pivot in US policy is something to watch out for because that would probably result in some driving-down of rates, and, hence, appreciation in bond portfolios.

Additionally, the increasing foreign investment in Indian bonds, driven by expectations of inclusion in bond indices, is another noteworthy trend. There is potential for appreciation from time to time, the secondary market is already showing that. So my sense is that, over the next 12-18 months, there is potential for appreciation from time to time and the secondary market is already showing that. So, one should consider having a longer duration in the portfolios, at least a 12-18 month time horizon.

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Does it make sense investing in gold at these prices? 

Even for equity investors, asset allocation remains crucial, as it ensures a balanced portfolio that includes both fixed income and equities. While fixed income serves as a buffer for emergencies and short-term goals, gold plays a unique role in mitigating volatility, particularly during challenging market phases.

During periods of market turmoil, which occur roughly every 5-10 years, gold acts as a hedge against downside risk, stabilising portfolio volatility. Despite potential currency appreciation counteracting some of its benefits, gold retains its significance in a well-diversified portfolio.

In fact, gold has historically provided double-digit returns, even amid market highs, making it indispensable for conservative investors. To effectively leverage gold's volatility-reducing potential, it's essential to allocate a reasonable portion of around 20 percent in the portfolio.

This ensures meaningful risk mitigation, unlike smaller allocations that have minimal impact on volatility reduction. If you have 50-60 percent in equities and just 5 percent in gold, it doesn't help in reducing volatility. Therefore, a 20 percent allocation to gold is advisable for any retail investor planning to build a balanced asset-allocated portfolio.

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