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We are big believers in mid, small-cap story, have focused on them for last 18 months, says Kanika Agarrwal of Upside AI

Over the long term, it is hard to imagine that only 100 companies will run the country—there is the need and scope for a wider breadth of companies to exist and thrive, says Agarrwal.

December 02, 2020 / 10:33 AM IST

Upside AI co-founder and Chief Investment Officer Kanika Agarrwal is not the one to get swayed by the mood of the market. Emotions and investment decisions don’t gel and that is also the abiding principle of Upside AI, one of the first funds in India to use machine learning to make an investment decision.

The fintech startup, the inspiration for which came from The Intelligent Investor by Benjamin Graham, was founded on the belief that technology makes better decisions than humans since machines are unbiased and unemotional.

A big votary of fundamentals when it comes to picking a stock, Agarrwal in an interview to Moneycontrol’s Sunil Shankar Matkar says investors shouldn’t change their rules and continue SIPs to average market levels. Edited excerpts:

Q: The market has hit a new high. Is it time to add to the portfolio or book profits to have some cash in hand?

Let's forget the market levels for a second. Generally, your equity allocation is part of your long-term, higher-risk portfolio. The assumption behind the companies you or your PMS/ MF manager buys for you is that they are fundamentally good companies. There could be a price-value mismatch in the short term but over the long term, fundamentals drive price performance.


Therefore, market levels are irrelevant. There are multiple metrics pointing to how the market is overbought and I can show you the same number of statistics on how a bull run is just starting.

The decision to make is not whether you should be invested – if you believe that in the long-term markets trend is up not down, you should always be invested. The decision to make is what you buy and the faith you have in your manager to invest in the right opportunities for you.

Therefore, we continue to buy and rebalance based on our standardised rules-based approach. We were buying stocks even through the March freefall as that was what our model dictated.

From an investor perspective, similarly, our advice would be don't change your rules—decide your equity exposure, continue SIPs to average market levels.

Q: Liquidity is chasing equity rather than other asset classes. Do you think FII flows will continue in the coming months?

Some tailwinds have driven FII flows so far. Emerging markets have lagged developed market performance so there seems to be some price/value arbitrage in emerging markets.

Risk appetite has been on the rise through the year with higher liquidity, rock bottom interest rates and weak crude prices. There are few more recent triggers like the US elections, COVID vaccine and the weak dollar.

Specifically for India, we have some interesting medium-term tailwinds—lower domestic interest rates, latent demand along with capex revival and opportunity of the China+1 theme.

I think FII flows are driven far more by global macroeconomics than specific India triggers. Therefore, they tend to be more fickle in the short-term because literally, the world is their oyster in terms of investment opportunities. Of this Rs 1 lakh crore, more than half is in November alone! Therefore, their flows are extremely unpredictable in the short term. Long term, over the last decades, FIIs have consistently increased flows into India as we all grow organically.

Q: What is your reading of IT stocks? The sector is already a top gainer with nearly 100 percent gains from March lows. Should one stay invested or book profits?

You will find a lot of sectors clocking over 50 percent gains since March. For IT specifically, the long-term story of the disproportionate role technology will play in our lives remains the same. The call to take is more company fundamental specific and not so much at the sector level.

We have had exposure to IT since March and continue to hold some Tier 1 IT firm positions in our portfolio.

Q: Do you think India will achieve its $5-trillion economy target ahead of the 2024 deadline following the recovery from the COVID-19 crisis?

Difficult, but not impossible. Most of the world has suffered a permanent loss. Therefore, no matter the speed of recovery, there will be a hole versus what could have been, and we, globally, need to accept that. A lot of our recovery from COVID will depend on how well we can execute on vaccine production and distribution—the government has been saying and doing the right things so far; we will only know in a year how well we execute.

Further, just to set perspective, the economy was in a downward spiral even pre-COVID. So even assuming COVID had not happened, the themes we need to solve as a country stay the same: execution on reforms be it GST or infrastructure—we have not seen a substantial tax increase or any significant investments from the private sector yet. The government is working on similar structural reforms across labour, agriculture, etc, it will all come down to execution and that is a multi-year process.

Q: Given the government's push for Atmanirbhar Bharat, will India become a manufacturing hub, especially when there is stiff competition from countries like Vietnam and Bangladesh?

China +1 is a very real opportunity but we cannot take it for granted. Just because the world wants to diversify away from China, does not automatically mean it will flow to us. These opportunities are available to most emerging markets (EMs). Countries like Vietnam and Bangladesh have done well over the past decade, pitching to be manufacturing hubs for low-skill, labor-intensive goods even as China tries to move up in the value chain.

We need to approach this strategically–focus on key sectors, create friendlier manufacturing policies, avoid the knee-jerk protectionist duties and think long term about the kind of industries that will exist in 20 years. The government seems to have the right intentions with Atmanirbhar Bharat, its performance-linked incentive schemes and labour reforms. As with everything else, execution is the key.

Q: Will 2021 be a strong year on all fronts after a forgettable 2020?

If 2020 is your base for comparison, then yes it should be. Will it make up for the loss of real capital and opportunity in 2020, unclear. Remember to recover from a 10 percent loss, you need to make an 11 percent gain from your lower base.

From the market's perspective, the question inevitably stays the same every month, quarter and year–is it all priced in?

For us, we will continue to be buyers over the next few quarters, focusing more on what to buy and not so much on whether to buy.

Q: Is it a time to invest in midcap and smallcaps rather than largecaps?

Interesting question because there are two opposing forces at work. Over the last two-three years, largecap valuations have gotten richer. Even despite the mid, small-cap rally, we are not even at early 2018 levels. Therefore, there is clear scope for a further rally in mid and small caps. Having said that, the crisis has helped larger companies consolidate market share and weather the storm better. Therefore, it is difficult to say what force will win over the short term.

Over the long term, it is hard to imagine that only 100 companies will run the country—there is a need and scope for a wider breadth of companies to exist and thrive.

We have been big believers of the mid and smallcap story and have focused on that for the last 18 months. Even within our multi-cap portfolio, 80-90 percent of our exposure has been mid and smallcaps and that has paid off very well in 2020.

Disclaimer: The views and investment tips expressed by experts on are their own and not those of the website or its management. advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Dec 2, 2020 10:33 am
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