Mumbai, Jul 18, 2023
“India seems to be in a structural bull run and a lot of economic activity is favouring small and mid-caps,” says Hemang Kapasi, head of equities at the wealth management firm.
There will be times when valuations run ahead of fundamentals and broader markets will correct, but that would be a good time to hunt for buying opportunities, Kapasi said in an interview with ETMarkets. Edited excerpts:
After 4 months of rally, do you think the equity market is overheating or you see more legs to this rally?
It’s natural for investors to doubt the sanctity of the rally when the markets have seen a one way move in the last four months. However, the recent rally has come after a one-and-half year of long grind in the markets. Therefore, the current move, though fast, is not necessarily excessive.
Even though the run up is led by sharp recovery in FII flows since March, from a valuation perspective, Nifty’s 1-year forward PE is still at a long-term average of ~20x even after the index hit a new all-time high. Therefore, the valuations look reasonable.
This also means that regardless of the macro issues in the world, the corporate earnings have continued to see stable growth and are expected to be robust in FY24.
As the market is ultimately looking beyond the noise and following earnings growth, which are looking decent at current juncture, we believe there is some more juice left in the rally.
That said, short-term blips will always keep coming as is the case in any rally or bull market.
The broader market has outperformed benchmarks by a wide margin. Do you see this outperformance continuing?
India seems to be in a structural bull run and a lot of economic activity is favouring small and mid-caps. Therefore, there will be several periods of small and midcap outperformance compared to the benchmarks. For example, railway and defence capex, along with government’s focus on indigenisation is helping several smallcap companies to deliver good numbers. The government PLI scheme is directly and indirectly benefitting the broader universe of companies. Some of these changes are long-term and should continue to help the broad market universe post good performance.
The current valuations also don’t look too stretched for broader markets. There will obviously be times when the valuation will run ahead of fundamentals and broader markets will correct, which might then be a good time for stock pickers to hunt for opportunities.
Which stocks/sectors within the midcap and small cap segments are you bullish on and would look to bet?
We have been quite bullish on industrials and manufacturing for quite some time now. Under this theme, we picked up manufacturing companies in auto ancillaries and capital goods, which are the sectors that have done well off late.
We are further looking into non-lending financials, healthcare, and EMS space, where we feel there could be structural long-term opportunities.
Can you take us through the performance of Sanctum Indian Titans in the last 1 year? How do you expect this strategy to perform given that India’s growth prospects remain strong vis-a-vis global?
The Sanctum Indian Titans has delivered post fees returns of 22.6% in the last 1 year. The past year and a half have been quite volatile for most strategies, but thanks to our proactive risk management, we fared much better than many of our peers.
Most of the portfolio is invested into India centric businesses and as we are also quite bullish on the India opportunity, we would like to keep the balance tilted towards domestic businesses.
We believe the portfolio should do well over the long-term and achieve its twin objectives of capital preservation while achieving benchmark beating risk-adjusted returns.
What is the strategy of stock selection in Sanctum Indian Titans and which sectors do you have maximum exposure in this strategy?
We follow a mix of top down and bottom-up approach for stock selection. We first identify themes that we believe hold long-term structural promise and then go bottom up in finding the best names within the theme.
We look for spaces that are currently overlooked by investors but may be seeing a turnaround or change in fortunes. We then screen for stocks which are the obvious beneficiaries of the rising tide and have the best-in-class growth, balance sheet strength, return on capital and an honest and competent management.
Sector wise, our largest exposure is in financials, followed by industrials and auto ancillaries.
Any major downside risks you foresee for Indian markets for the rest of 2023?
The downside risks may be a worsening of the geopolitical situation, which the markets across the world have completely forgotten.
Back home, several state elections will happen in the run up to general elections next year.
If the market senses a political instability at the centre from the state election results, we might see increased volatility before the general election results come out.
With markets at new highs, what kind of asset allocation will you recommend to investors?
The current market high doesn’t seem to be a big reason to worry as these highs are not coming with excessive valuations. Therefore, investors must continue to invest systematically without trying to time the market.
Historically, markets have spent much more time going up than they have going down. For this phenomenon to continue, the markets will have to scale many more highs.
There will be corrections and dips along the way and that will also be a good time to systematically add to equity portfolios for long-term wealth accumulation.
One specific advice to investors will be to remain vigilant for highs that come with frothy valuations. That’s probably a time to hold back and wait if one is planning to put large lump-sums.
For more information, please visit www.sanctumwealth.com