Edited excerpts from a chat:
Investors who have made enough money in the non-stop bull run are now confused about whether they should stick with their SIPs or withdraw a decent part of their portfolio. What would be your suggestion?
SIPs are disciplined way of averaging out different levels in the market. It has been a wonderful tool to smoothen out returns over long-term cyclicality of both the market and portfolios.
What seems to be deviating right now is the trajectory of valuations and the growth of the economy. Valuations in a lot of businesses are running ahead of time – the expectations are building up significantly. In situations like this, what is not factored into this scenario is an external event which could derail executions. Investors need to balance this view before taking any view of incremental investments.
Your question above can be answered by asset allocation. There are risks, but if you are underinvested, it makes no sense to withdraw any capital – you could use any downward volatility in any case to get invested. However, if the overall asset allocation has increased in favour of equity a rebalancing of the same may make sense.
Isn’t valuation the biggest risk, besides geopolitical factors, that can disrupt the bull run in the next few months?
As investors valuation is key to determining an entrant into a new company/ business. We do agree valuations are trending at a high of their band and there is a probability of a time or a price correction. But we need to have a mindset on how we should use these corrections to allocate/ reallocate capital. What you can’t take away from an economy like India is its sheer scale and a demographic structure if used well can create very valuable businesses. On the corrections itself – given the structure of corporate balance sheets which are at their historical low in leverage/ debt – it is unlikely that any sell-off would be very deep. Valuations may not increase, but if the environment continues to be conducive for corporate profitability, this may remain elevated.
What international investors do have is a choice – if they want a value market, several countries in the west as well as China give you an opportunity. Growth is there in a select few regions; we are one of them. But for this, there is a price to be paid.
Which sectors would you suggest investors stay away from?
The current marketplace has a phenomenal amount of momentum. Valuation is factoring in multiple years of growth. Our portfolios are currently reducing exposure to some of these names.
Our preference in the recent past has been to allocate to companies/ businesses which are globally competitive – have finished their capex cycle and are now increasing their market share either by industry or at a company level. Increasingly more businesses with dollar revenues are finding a place in the portfolio.
Our belief is that if India must move from 3.5% of World GDP to 5 or 7%, it cannot come from the same inward-looking businesses which did well over the last few years. We are not bearish on the opportunity of these companies; we just think that they are more than adequately priced for the opportunity.
Would you agree that PSU rail stocks are a momentum play in the short term but pricey to own for the long term?
I would not know how to comment on individual opportunities. But from an investment philosophy – we like the comfort of valuations more than trying to capture future growth.
How attractive is the IT sector, especially largecaps, given the valuation and order pipeline?
The industry has done well in the short term, and the reason is also from the order pipeline various participants have accumulated over the past couple of years. While it remains a mature sector, we don’t expect significantly differentiated returns from the industry. For all the above reasons largecap IT services could be one of the best sectors to hide in when there is a lack of new ideas.
Can you explain what makes you think that the real estate sector is in the early stages of topping out? Typically, real estate sees a cycle of 8-10 years.
The stocks have done well here and to date, it has been on the back of volumes. This time around, which is the next cycle – do expect real estate prices to do well. Consolidation, cash flows and a buoyant demand environment have helped the sector to do well.
We tend to get a bit apprehensive when all participants in an industry do well. And that seems to be happening out here. Profitability and easy access to cash from investors are usually a lead indicator of competition. From here, we would only witness an increased competitive activity, which is why we believe we are in the early stages of the cycle topping out. While saying this, this cycle could take a long while – we would not be able to time the top.
Which sectors are offering value even at this stage of the bull market?
I would not really go out looking for value in a market that has none. We have been in this state for some time now. As an active manager, we need to move our lens to 2030, then we could look at some probable opportunities that would be a part of the portfolio. But I would never say there are value opportunities in the current market environment.