These 22 stocks helped the top 5 PMS schemes outsmart Nifty in January

A couple of months ago, the Chinese market had been underperforming due to its zero-COVID policy. However, “during this period, our domestic market was outperforming its peers, leading to India's PE premium increasing to 110 percent and now, with the Chinese economy opening up, its equity market has been reviving, and the huge divergence between the FTSE India and EM market is now shrinking,” added Chadawar.

This shift has led foreign institutional investors (FIIs) to park some money in the Chinese market and based on that, India has seen an FII outflow of $4.1 billion on a year-to-date (YTD) basis (till February 10) while domestic institutional investors or DIIs have added $ 4.9 billion during the same period. However, there is a brighter and encouraging side to it as FIIs have added $ 4.3 billion in the Indian equity market in the last six-month period.

Some experts suggest that the FII selling witnessed in January was more event-based rather than on any fundamental or technical reasons.

Gaurav Dua, senior vice president and head of capital market strategy at Sharekhan, now an arm of BNP Paribas, said, “Almost all categories witnessed underperformance vis-à-vis the Nifty during the month, mainly led by heavy FII selling and selling pressure sparked by the Hindenburg Research report over the Adani group.”

However, Dua does not expect any meaningful correction since a) current valuations at 18.8x and 16.2x FY24E and FY25E earnings, respectively, do not look expensive, b) India continues to offer healthy risk-reward proposition given superior earnings visibility and c) a pro-growth Budget 2023-24 that offers robust allocation towards capital expenditure and supports corporate earnings.

Sectoral underperformance

Of the 18 major sectoral indices on the BSE, only six managed to beat the BSE Sensex in January and generated positive returns. The BSE Auto and BSE IT indices were the top two outperformers of the month with BSE Auto leading the race with returns of 5.3 percent, while the BSE IT index gained 3.4 percent. Other sectors that performed better than BSE Sensex were BSE Teck (+1.8 percent), BSE Metal (+1.4 percent), BSE Capital Goods (+1.4 percent) and BSE FMCG index (+0.2 percent).

BSE Power was the biggest loser of the month with a decline of close to 11 percent and was followed by BSE Oil & Gas which lost 9.25 percent. BSE Bankex and BSE Consumer Durables lost over 5 percent each.

“Power and Oil & Gas were the worst performing, but this could have been impacted by the Hindenburg report on Adani stocks which should be temporary,” said Vikas V Gupta, CEO and chief investment s, OmniScience Capital.

“The benchmarks outperformed broader indices in January on expected lines as volatility in small- and midcaps remain high owing to weaker results and low liquidity,” said Anil Rego, founder and fund manager at Right Horizons.

Auto companies showed good traction and IT players now seem fairly valued on the back of stable results. However, the rally in FMCG players was brief as discretionary consumption took a hit, added Rego.

Winners from the PMS world

Even as the Indian markets were sailing choppy waters during January, there were many portfolio management services (PMS) schemes that generated better returns compared to the Nifty and Sensex.

PMS schemes cater to wealthy investors with ticket sizes exceeding Rs 50 lakh. Their professional fee structure is different from that of regular mutual funds.

Of 318 schemes tracked by pmsbazaar.com in June, 171 schemes (54 percent of the total) performed better than the Nifty while 140 schemes (44 percent) could not generate returns better than the benchmark. Data was not available for 7 schemes (2 percent). Forty-three schemes (14 percent) generated positive returns, while the returns generated by other schemes were in the negative.

The highest return of 3.29 percent was generated by Pace Financial Investment Adviser - Sustainer scheme, followed by Hem Securities – India Rising SME Stars (+3.08 percent), Pace Financial Investment Adviser – Prive 1 (+2.78 percent), Pace Financial Investment Adviser - Prive (+2.47 percent) and Counter Cyclical Investments Private Limited – Diversified Long Term Value (+2.35 percent).

Not all of these top schemes disclosed their stock holdings for January. Moneycontrol collated a list of the top five from among those that did disclose their holdings.

This list may give investors an idea about which stocks the fund managers of these schemes bet on. But they should not be considered ‘buy’ recommendations as every fund manager has his or her own investment strategy.

Counter Cyclical Investment Pvt Ltd – Diversified Long Term Value

This small – cap focussed scheme generated returns of 2.35 percent in January with its top five holdings constituting stocks like MPS Ltd, Orient Bell Ltd, Ambika Cotton Mills Ltd, SKM Egg Products Export (India) Ltd, Jenburkt Pharmaceuticals Ltd.

NJ Asset Management – Bluechip

This scheme generated returns of 2.26 percent by investing in multi-cap stocks like LTI Mindtree Ltd, Persistent Systems Ltd, Tata Elxsi Ltd, APL Apollo Tubes Ltd, Coforge Ltd.

NJ Asset Management – Dynamic Stock Allocation Portfolio

The top holdings of this multi-cap focused scheme were Nippon Arbitrage Adv-DG, Axis Enhanced Arbitrage – DG, Persistent Systems Ltd, LTI Mindtree Ltd and Tata Elexsi Ltd. It generated returns of 2.09 percent for its investors in January.

NAFA Asset Managers – NAFA Clean Tech Portfolio

This mid-cap focussed scheme generated returns of 1.45 percent in January by investing in stocks such as KEI Industries, Hitachi Energy, Linde India, Borosil Renew and Tata Power Co.

Carnelian Asset Advisors – YNG Strategy

This scheme generated returns of 1.32 percent in January with its focus on multi-cap stocks like ITC Ltd, Bajaj Auto Ltd, HCL Technologies Ltd, Hindustan Aeronautics Ltd and Bharat Petroleum Corp Ltd.

Near-medium term outlook

Experts maintain their earlier opinion that the Indian economy stands at a sweet spot of growth and remains the land of stability against the backdrop of a volatile global economy. They continue to believe that the long-term growth story of the Indian equity market will be supported by an emerging favourable structure, as increasing capex enables banks to improve credit growth and strong earnings trajectory continued in the Nifty 50 universe to a large extent.

“We foresee Nifty EPS to post growth of 11 percent/14 percent/13 percent in FY 2023/FY2024/FY2025. Thus, we maintain our December 2023 Nifty target at 20,400 by valuing it at 20x on December 2024 earnings,” Chadawar of Axis Securities told Moneycontrol.

While the medium- to long-term outlook for the overall market remains positive, volatility may prevail in the short run, with the market responding in either direction. The Adani debacle, the Securities and Exchange Board of India’s subsequent response, increasing China-US friction, inflation and interest rate debate, and FII sentiments will continue to sway the markets in the medium term, but these are beyond one’s forecast or control, and this shouldn’t affect one’s investment decisions.

With this view, the current setup is a ‘buy on dips’ market.

Chadawar’s recommendation for investors is to maintain good liquidity (10 percent) to use such dips in a phased manner to build a position in high-quality companies (where the earnings visibility is high) with an investment horizon of 12-18 months.

Rego of Right Horizons is of the opinion that “in the first half of the year, we can witness some demand cooldown on the back of rising rates, which is expected to hurt smaller companies more than their large-cap peers.” Thus, on the back of contraction in the Indian market’s premium over global counterparts and the demand slowdown scenario domestically, he expects large-caps to do well in the first half of 2023.

If the interest rate peaks out in the first half, demand is seen coming back to the broader market, making it more attractive due to earnings support.

On the valuation front, large-caps and midcaps trade at around 5 percent discount to long-term averages on a trailing PE basis. However small-caps seem to be beaten down and trade at more than 40 percent discount to their long-term average. This makes Rego bullish on small- and midcaps for the second half of the year.

There has been a long period of underperformance in the broader markets and after factoring in the negatives, the valuations are comfortable, and a rally in the medium term cannot be ruled out.

“Small- and mid-cap category would be most ideal given the valuations in this space and their growth potential,” said Sreeram Ramdas, vice president, Green Portfolio. “Many manufacturing firms with strong fundamentals faced the brunt of inflation which was reflected in thinning margins, and once inflation started to ease, they are faced with a global slowdown in demand, especially from their export markets of the US and EU.”

Markets have heavily and steadily discounted many such names despite their having strong guidance, world-class management and solid overall fundamentals. This is the undervaluation that experts suggest is worth exploiting.

From the stock-specific perspective, experts are more bullish on domestic-focused businesses, as globally they expect growth to be muted for 2023, and hence export-oriented businesses won’t see much traction. However, they expect another year of mid-teens earnings growth for key indices.

Businesses focusing on auto, banking, manufacturing and building materials will see sustained demand on the back of cyclical recovery and also because of the government's focus on infrastructure development and supporting domestic manufacturing through various schemes like FAME, PLI, etc.

Disclaimer: The views and investment tips of investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.