Small cap investing is a high-risk high return investment strategy and one should only go with quality fund managers who have delivered returns in the long term in their portfolio.
Super 30 was a hit, therefore HRITHIK will continue to be the flavour of the markets, for now, Vinay Pandit, Head, Institutional Equities, IndiaNivesh Securities Limited, said in an interview to Moneycontrol’s Kshitij Anand.
Edited excerpts:Q) What triggered this sudden market meltdown? The Nifty50 not only broke below the 200-day moving average (DMA) but also breached the crucial 11,000 psychological support this week. What is weighing on the market?
A) Virtually every index stock was in the red last week. Concerns of earnings growth (barring cement – in the index) is the key concern for this selloff amid pressure on earning expectations coupled with the new surcharge applicable on FPIs (foreign portfolio investments).
The earnings estimate of several analysts itself show a lower expectation YoY (year on year) and therefore, whatever was being discounted in at the beginning of the year is now seeing a further deeper discount.
Auto, consumers, banking continue to be impacted by local factors, while oil and gas got impacted due to global factors along with rupee appreciation.
Pharma is within its troubled zone, with the USFDA issues refusing to die down, while the two listed telecom companies are only seeing subscriber drops every month led by the Jio effect and lower realisations per user.
Cement, airlines, hotels, select consumption stocks (the likes of D-Mart, V-Mart, Relaxo Footwear, Bata), tyre companies and chemical companies (due to the China factor) continue to be the sectors seeing positive trends.
Q) How long can the HRITHIK stocks take the market higher? Do you think we are unlikely to break out into unchartered territory?
A) On a lighter note, Super 30 was a hit and therefore HRITHIK will continue to be the flavour of the markets for now. On a serious note, other sectors and overall consumption need to start showing up for investors to expand their investment choice.
Valuations always follow deliverables. HRITHIK stocks will find it tough to hold markets for too long on their own shoulders. Other companies and sectors need to start contributing and they need to that “fast”, failing which a correction may be imminent.
Q) Foreign investors have pulled out more than Rs 15,000 crore from the cash segment of the Indian equity markets in July. Is the tax surcharge on super rich dented the sentiment?
A) There is definite pressure on FIIs to deliver super returns (beyond benchmark) to be able to justify the multiple taxes, especially LTCG (long-term capital gains) and the additional surcharge.
Club it now with DDT (dividend distribution tax) and Buyback Tax and virtually there is no room to not get taxed on your investments in equity, directly or indirectly.
Keeping this in perspective, it will be challenging to beat index returns adjusted for rupee depreciation effect.
Q) Any big surprises or disappointments you have spotted in India Inc this earning season?
A) The big surprise has been cement and airlines. Indigo delivered a stellar profit of Rs 1,200 crore for the quarter (something that we were estimating in Q3–their best quarter) while cement companies are expected to deliver their best EBITDA per tonne.
ACC has already delivered an EBITDA per tonne of Rs 1,073 for Q2CY19 vs Rs 667 in the prior quarter and Rs 872 in the same quarter last year, primarily due to all-time high prices for cement companies.
Disappointments continue in banking and auto sectors. Auto sector volumes continue to disappoint with the likes of Maruti, where volumes declined by 14 percent YoY, M&M (down 6 percent) Hero Motor (down 13 percent) Eicher Motor (down 22 percent), and Tata Motors (down 17 percent) on overall volumes.
Initial banking sector numbers haven’t been too encouraging either, with Yes Bank, RBL Bank, and DCB Bank reporting higher delinquencies.
IndusInd Bank seems to be on the path to normalcy, with the watch list declining marginally from 1.9 percent to 1.7 percent, while Federal Bank’s strong Other Income led to profit beat, even as core earnings and business continued to be in line with street estimates.
Q) Nifty could well be trading around record highs but there is a mismatch in terms of valuations and also the economic fundamentals. Is that a scary situation for investors?
A) The Nifty, as of today, cannot be compared with the highs of yesteryears. Capex no more drives the Nifty. The index is driven primarily by BFSI (banking, financial services and insurance) and consumption.
The Nifty today has nearly 40 percent weight of the BFSI sector, which is simply never valued on a Price/Earnings ratio. So Nifty P/E on a wholesome basis may be a misnomer.
But, definitely certain BFSI stocks like HDFC twins and Bajaj Finance continue to be overvalued due to paucity of quality investment options.
Similarly, consumption stocks in the Index are overvalued due to significant interest in these companies, and lesser float availability lowers down the market cap (below Rs 5000 crore), leading to major portfolio allocations happening in these stocks.
Q) Legends say long-term investors should buy the ‘fear’. Is it time to buy the 'fear' or in other words stocks for a long term portfolio say with a time horizon of three to four years?
A) Large chunks will always be available with zero impact cost in troubled times. And therefore these are good times to buy quality stocks at lower valuations when there is more fear and less greed.
Large institutionalised investors always look at time horizons of three-five years and hence a perfect time to accumulate quality names at lower valuations. But, one should buy in such times on quality names, which have stood the test of corporate governance, transparency and adequate disclosures in the last five to ten years.
Filtering on these factors is “very important” and the “most important” criteria and Rule No 1 of investing in current market conditions. I wouldn’t bet my money in current markets with promoters who may potentially look to correct themselves in the coming years.
For example, major auto stocks like Bajaj Auto, TVS Motor, Hero Motocorp, Maruti Suzuki have never had issues of corporate governance and are currently beaten down due to sector headwinds.
Q3FY20 will start showing the waning effect of inventories as well as a lower base effect, hence a bounce-back is imminent. So, the best time to accumulate would be now.
Q) People are losing money. One of the top fund managers wrote to investors, saying he got it wrong. And, that is investors’ money we are talking about. Most of the funds have not given returns as one would have liked. How should investors structure their portfolios? What should be their strategy?
A) Small-cap investing is a high-risk high-return investment strategy and one should only go with quality fund managers who have delivered returns in the long term in their portfolio.
However, I believe every fund manager has his day under the sun and off days. Investors should invest based on the quality of stocks in a portfolio. Those seeking high returns should also be ready to take higher risk.
There are several caps where management quality is very high, business quality is very good and earnings potential and moat are high. Investors should focus on these areas and quality portfolio allocation.
Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.The Great Diwali Discount!
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