Sunil Singhania on the current sell-off, top risks, where to fish, what to avoid

Sunil Singhania, Founder, Abakkus Asset Manager LLP

How do you view the current sell-off?

It is a bit worrying. These large shifts in global markets, especially currencies, are never good. They shake the confidence of global investors. Risk premiums go up. Plus, we have seen a big move in equities already for some time. Most markets have bounced back from the initial shock, and US Futures are also showing a positive trend, but this will take time to settle down.

Possibility of a big sell-off in India?

India did not fall much yesterday. But today it bounced back smartly, only to give up the gains. There is some weakness – money-making had become too easy. This is the time to be cautious for sure. On the brighter side, our macros are good. The monsoon should be good as well, so we could see a good festive season. The currency is fairly stable, and so are yields, but markets will remain volatile and take time to settle down.

How much more correction could we see?

Not more than 10% from the top – we have already seen about a 4% fall from the top. Specific stocks could fall a lot more, of course, because there are stocks that have been overhyped. That is also where the fall has been maximum this time around.

Post-pandemic every dip is bought into. Does this make you feel comforted or worried?

Out market fundamentals have been clearly improving. The Nifty is trading at around 17.5x PE on an FY26 basis, which is only 5-6% higher than the 10-year average, not euphoric levels like 25-30 times. So gains have mirrored profit increases, largely. While some smaller, theme-based companies have surged, overall valuations are fairly reasonable.

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Is "buy on dip" still a good strategy?

I think “buy on dip” works well in a growing market, but investors need to be cautious.

Where would you recommend selling at every peak?

Some sectors, like public sector defense companies, are trading at 17-18 times sales, which is excessive. Similarly, railways and companies announcing EV ventures see irrational surges. So, while "buy on dip" works, selling on peaks could be wise in certain overheated pockets.

You had a 15x15x15 rule to investing. 15 per cent growth, with 15% ROE at 15x P/e.  Are you revisiting your formula given the current market dynamics?

We're still looking for 15% growth and a minimum ROC/ROE of 15%. On the PE front, we aim for an average of 15 times one year forward PE for the portfolio. Though managing this is getting tougher with market movements.

What’s your view on PSUs, especially in sectors like power and defense?

Not all PSUs are overpriced. Some, like PSU banks and certain energy and metal companies, still have room for growth due to strong fundamentals and high demand. The power sector, for example, is benefiting from economic growth and the push for manufacturing in India.

How do you view the mid-cap and small-cap segments, which have done exceptionally well recently?

While mid and small caps have outperformed large caps significantly in the last few years, this gap will narrow. Over a 3-4 year perspective, they may still offer slightly higher returns, but stock selection is key. It's not about treating them as a uniform basket.

What is your view on the consumer sector? You’ve avoided them in the past citing high valuations. Now some of the investment-driven stocks are more expensive…

Consumption in India is a great theme, driven by a large population and increasing discretionary spending. However, paying 60-70 times PE for a company growing at 10% is not justifiable. One should look for reasonable valuations relative to growth potential.

Also Read | Sunil Singhania warns against small and mid-caps seeing meteoric rise, says overall market valuations reasonable

Can you share three themes where your conviction is highest?

I'm very positive on:

1. Private sector banks, which benefit from consumerism and are currently undervalued. If interests rate comes down, the case for these stocks become even better.
2. Pharma stocks look good considering their growth potential and reasonable valuations.
3. Asset and wealth management industry, as increasing wealth leads to more savings and investments.
4. Selective consumer stocks, especially in the discretionary segment, offering significant opportunities.

How about capital goods stocks? Multiple are fairly high in this space.

Yes, but some of the companies are very high quality companies. If their valuations comes down in this correction, they will offer good entry points again.

How do you view the real estate sector?

Real estate is a long cycle sector. While some areas, like parts of Mumbai, are becoming too expensive, there’s still potential, especially with expected interest rate cuts. Real estate investment for own consumption is promising, but as an asset class, equities are still better.

Do you see a case for investing in real estate stocks?

We prefer housing finance companies and building materials. Building materials will come into play more prominently in 2024 as construction projects near completion.

What kind of return do you think investors should brace for over the next two to three years?

We believe the next two to three years will see low to mid-teen returns. Definitely, not the 30-40% CAGR of the past.

What is your advice to individual investors directly investing in equities?

Investors need to understand that the next few years are for consolidation, not extraordinary returns. It's crucial now to know what not to do—like avoiding overvalued stocks or small companies with poor fundamentals. It’s not so much about what to buy, which is where most investors tend to focus on.

What are the top risks to the market?

Visible risks are limited, but geopolitical issues like Israel-Hamas conflicts are unpredictable, but that is dominating conversations everywhere. We got to be watchful of the bangaldesh situation also. Having said that, major market corrections often come from unforeseen events. On the domestic front, there’s no significant risk that stands out.