In an interview with ETMarkets, Rastogi said: “We focus our efforts on finding high-quality small-cap companies which we believe are undervalued and relatively unknown in the wider institutional investment community” Edited excerpts:
What is the possible fallout on various asset classes after Fitch downgraded the US?
The U.S. Treasury Bonds and the US dollar have not moved much after this downgrade as the continued increase in U.S. debt is already well known.
So, we don’t think this event alone will impact asset prices much. The main driver for the global markets currently is the trajectory of inflation and the risk of economic slowdown.
Having said that, investors should pay attention to the outperformance of the U.S. dollar against all major currencies over the last decade.
Though currency cycles are long and it’s difficult to forecast their timing, history suggests that an eventual reversion to the mean happens, and when that happens, we would expect that international currencies and stocks will benefit, as we have seen during previous cycles over the last 30 years.
With the Indian market near record highs, how are you looking at India in your EM portfolio?
We currently have an overweight position to India in our EM portfolio. But that wasn’t always the case. We launched the portfolio 5 years back with a marginally underweight position to India, which was due to rich valuations in the small-cap space and a challenging macro environment.Over the last five years, we have continued to find interesting opportunities that fit our investment style, corporate governance, and risk/reward parameters.
While the market is at record highs, we are continuing to find attractive opportunities in India given the structural changes and reforms that we have seen in the last few years.
You call yourself ‘International Small-Cap Specialists’. How do you pick mispriced opportunities? What filters do you use?
We focus our efforts on finding high-quality small-cap companies which we believe are undervalued and relatively unknown in the wider institutional investment community.
We use a proprietary quantitative model that seeks to capture stocks with high profitability, a strong balance sheet, and strong and stable historical earnings growth.
These stocks typically also have lower than average beta and outperform during periods of sluggish economic growth and recessions.
The team then applies fundamental bottom-up analysis to companies identified by the model, to identify businesses that can continue to grow for a long time.
Traveling to meet companies is also an important part of our investment process and due diligence.
Have you seen any change especially after COVID & GST – how the universe of small caps has evolved?
GST is one reform, but we believe that several reforms implemented in the last decade caused some pain in the short term but have also created a great opportunity for more sustainable growth of the economy in the long term.
The awareness about the importance of good corporate governance has increased, which can be an issue with small caps. China + 1 has become a major strategy for global companies and that has created new and huge growth opportunities for many Indian companies.
India as a potential beneficiary of the “China + 1” theme. What is Kabouter hearing from corporates in Europe and Japan about India?
We have conversations with companies globally and have been hearing very positive views about corporate investments in India.
China+1 is not new as companies have been looking to diversify their supply chains from China for several years, primarily to manage rising labor costs in China.
However, the supply chain disruptions caused by COVID accelerated that shift, and with the reforms that have taken place in India, the country has become an exciting alternative to China.
India’s rich pool of technology talent, competitive labor costs, and large domestic market are the main drivers, and in our conversations, India is consistently mentioned as one of the top 3 choices for most companies who are looking to diversify away from China.
How different is small & midcap space in India compared to the international market?
In terms of the long-term performance of the asset class, small caps in India have outperformed large caps which is similar to the outperformance of small caps in the broader Emerging Market Index as well in the EAFE index (non-US developed market equities).
This year, however, small caps are underperforming large caps in most markets globally except India. Small caps tend to underperform large caps during times of economic uncertainty, which is the case currently.
Indian economy has been resilient to global challenges and that’s one of the main reasons why small caps have been doing better here.
Which sectors are looking attractive in the small & midcap space here in India?
We are bottom-up stock pickers and, given the inefficiencies in the small-cap space, we are finding opportunities in many sectors. In some sectors, valuations have run up, which limits the near-term upside.
But sectors like commercial real estate (REITs) have suffered from COVID-related headwinds, and while those headwinds are receding, we believe that the valuations are still attractive.
The Health Care (Pharma) and Materials (Chemicals) sectors also provide good opportunities for bottom-up stock pickers as many companies have been hurt by raw material price volatility and, in some cases, weaker global demand.
How are we placed — Indian market vs other Emerging markets in terms of long-term market opportunity.
We believe that India presents one of the most attractive long term structural growth opportunities among emerging markets, and it has a large and underpenetrated domestic market that sets it apart from some other markets.
Like other emerging markets, such as South Korea and Taiwan, India stands to benefit from secular growth themes like digital transformation, which should drive global demand for technology and software.
We are also bullish on broader Emerging Market equities. After years of underperformance relative to US markets, the absolute and relative valuations of Emerging Market equities are very attractive.
Emerging Market currencies also remain cheap relative to the US Dollar which makes the export businesses to remain competitive in the global market.
What is your take on Make in India campaign by the Indian government? Is the step in the right direction which could lead to money-making opportunities in the near future?
India has been a laggard relative to other countries when it comes to manufacturing. The infrastructure and the supplier ecosystem that companies need to be globally competitive does not exist in India yet.
So, we believe that Make in India is a great initiative to make manufacturing competitive here. India already has very competitive labor costs, and the schemes related to Make in India are pushing a lot of corporates to consider India for their long-term investments.
Like any major reform, the progress may seem slow in the initial years, but we believe that the building blocks are in place to position India as a globally competitive manufacturing hub in the coming years.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)