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Either the highly valued large-cap stocks will correct or the rest of the market will go up: Deepak Chhabria

Increased inflows into large-cap stocks led to valuation running up

December 23, 2019 / 12:18 PM IST

In 2019, investors in stocks and equity mutual funds faced many googlies. A market rally that was narrowly led by very few stocks, and the dichotomy between rising stock markets and a deteriorating economy, meant that investors were faced with quite a few challenges. In this regard, Deepak Chhabria, CEO and director of Bengaluru-based wealth management firm Axiom Financial Services explains how individual investors should approach the markets in the CY2020, in a conversation with Moneycontrol’s Nikhil Walavalkar. Excerpts:

 Q: Though the Sensex and Nifty are at all-time highs with double-digit returns over the past one year, the mid and small-cap indices are in the red. Why is there such a divergence in the market?

A: After the Infrastructure Finance and Leasing Corporation (IL&FS) crisis in 2018, there was a huge liquidity crunch in the economy. Even good non-banking finance companies were in trouble because they could not raise money. A lot of corporate governance issues crept in when there was a liquidity crunch as many companies could not raise money, delayed interest payments and could not repay their lenders.

This led investors to rush to the safety of some large companies that had good corporate governance. Hence, a handful of large stocks in the Nifty or Sensex and of a few multinational companies are quoting at a huge valuation multiple, while the rest of the market is languishing. Even mutual funds’ portfolios have a very large concentration of a few such stocks. But this kind of divergence cannot last for a very long time. Either the highly valued large-cap stocks will correct or the rest of the market will go up and bridge the gap. It is likely that both these things will happen simultaneously.


Q: We have been seeing weak economic indicators. Yet, the equity markets have been going up. How do you interpret this mismatch?

A: Equity investors tend to react much ahead of economic indicators going up or down. The market anticipates that the measures already announced by the government over past few months will lead to an upturn in the economy in the coming quarters.

The measures taken such as corporate tax rate cut will definitely have some positive impact in future. As far as economic indicators, are concerned, in the next quarter, you will see a revival taking place. Lower interest rate and corporate tax rates will lead to a revival in the economy.

Q: Inflows to large-cap-oriented equity funds have been rising over last one year. How do you see the situation given the elevated valuations in this space?

A: Investors bought into large companies because they have robust balance sheets and can withstand a slowdown. Also, corporate governance issues are better addressed in this space. Increased inflows into large-cap stocks led to valuation running up. If growth does not return or is lower than what is anticipated, then these valuations are not sustainable. Some correction may happen in the large-cap space.

Often, investors have the tendency to invest by looking at the last one year’s performance. Hence, many have invested in large-cap funds, avoiding totally the mid and small-cap spaces because they were doing badly. But the economy is expected to revive. Mid-cap stocks have taken a hit over the past 18 months. Investors should consider rebalancing their equity portfolios and invest in multi-cap and well-managed mid-cap equity schemes.

Q: Are there value-buying opportunities in stock market? What are the risks?

A: Let’s begin with the risk. When you leave bonds behind and enter equities, you are taking additional risk for additional return. Addressing the risk is important. Investors need to stay in the boundaries of asset allocation. Rebalancing should be done whenever there is an opportunity.

Now, we have a situation wherein mid-caps are languishing and large-caps have gone up substantially. It is time to look at mid-cap funds. Invest through a systematic investment plan. If you have a lump-sum invest through a systematic transfer plan over six months. There is a lot of value in the mid-cap space. These are avoided by investors purely by looking at past performance.

Q: Investors have been sold SIP as a sure prescription to creating wealth. However, the focus on small and mid-cap spaces has not rewarded them much even after investing money for three years. What would your advice be for such investors?

A: In 2016-2017, purely based on past returns, many investors chose to start SIPs in mid and small-cap funds. The cost averaging took place at higher NAVs. When the market corrects, investors loses money. Investors need to stay put in the market falls and also invest now, and wait for the next uptick. When that happens, the NAV will be higher than the average cost of accumulation and you will see returns.

Investors’ expectations need to be re-calibrated. Returns of 18 to 20 per cent from mid-cap funds are not possible. Set the expectations right – up to 2 percentage points extra returns than those offered by large-cap funds.

Q: SEBI has turned its attention to portfolio management services (PMS) and came up with a slew of guidelines lately. But it has not said anything on costs. Do you think there is scope for PMS costs to come down, just like the way we saw in mutual funds?

A: As far as overall expenses of PMS offerings are concerned, they have become extremely competitive. Competition would ensure that the costs go down. Already, there are PMS providers who have introduced a cap on their expenses voluntarily and are sticking to those limits. That lower expenses mean better performance, is getting accepted in the PMS space. Even if the regulator does not step in, competition will ensure that the costs come down in PMS.

Q: What is your view on gold?

A: I am bullish on gold and every investor should start allocating some money to gold. Negative interest rates in many parts of the world will make investors consider investing in gold. Many central banks have been accumulating gold in their reserves in the last few years. That makes a strong case for investments in gold. One should start with a five per cent exposure to gold and later increase it if required.
Nikhil Walavalkar
first published: Dec 23, 2019 08:52 am

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