In an interview with ETMarkets, Chandan said: “If you are able to find good companies in largecaps at the right price, they offer better risk-reward opportunities compared to midcaps and smallcaps,” Edited excerpts:
After three consecutive months of positive returns, Nifty started September on a muted note. What is weighing on D-Street?
If you look at the macro setup for India, it is in a very, very favorable position. We are seeing steady GDP growth, steady earnings growth, and the balance sheets of banks and the corporate sector are unlevered or, rather, very healthy currently. We have seen a good capex program by the government, and we are hoping that private capex will also pick up soon.This feeds into the consumer cycle as well. So, the setup in terms of the corporate and economic background is very good. However, in the past two years, because of the sharp rally, some areas have become a little expensive. That’s why markets are now looking for milestones.
If any sector or company confirms that its growth journey is on track as expected, those stocks will keep trending upwards. Otherwise, people want to recheck, reassess their estimates, and then move forward.
The chatter of a slowdown has picked up, especially in the US, which could also extend to other developed economies. What are your views? How will it impact India?
In the US, even the lag indicators of the labor market are now showing a slowdown. A couple of weeks ago, the Fed gave a green signal that they are definitely going to cut rates in September, so that is a certainty.
Now, the question is whether it will be a 25 basis point cut or a 50 basis point cut. The desirable real rates in the US economy are still far away, so this rate cut cycle could be quite protracted. Obviously, the global slowdown affects India.We are not completely decoupled from the world. I would say we are connected through three main points. First is trade, meaning imports and exports.Second is flows, whether FDI or FPI flows. And the third is price, whether inflation or deflation. We have two negatives and one positive.
First, let’s look at trade. We will see some slowdown in the export sectors this year. Since we are connected to the world, the growth of these companies depends on the growth of their markets, which is likely to be slow this year.
In terms of flows, when interest rates start moving down, we expect flows to improve for emerging markets.
However, flows do not immediately increase with the first rate cut, so there could be some lag between foreign investor flows and the rate cut.
The third part is inflation/deflation. Here, we have some positive news that due to the global economic slowdown, metal and chemical prices are coming down.
The only area of concern is the geopolitical issue, which generally affects oil prices, particularly with the situation in the Middle East. If that flares up again, we may see pressure on oil prices, leading to rising inflation.
Overall, though, India is still better placed compared to other emerging markets that rely heavily on exports. So, we may need to be selective in terms of exposure, with domestic sectors currently being preferred over export sectors.
So, IT stocks might see a rough few quarters if we do see a slowdown in the US?
Absolutely.
The market is recording new highs – does this make you cautious or more bullish at current levels?
Frankly, I do not worry about record highs in terms of price. I worry about record highs when it comes to valuations.
If you look at the midcap and smallcap categories, the average valuation over the past 10 to 15 years shows that companies are trading at about one to two standard deviations higher than their previous valuations, with some trading at all-time highs. Surprisingly, this is not the case with largecaps.
In largecaps, Nifty is trading slightly higher than its average valuation but has not reached very high or historic valuation levels. So, in a way, largecaps become an easier choice right now compared to midcaps and smallcaps.
There will definitely be good companies and businesses that are worth investing in for the long term. However, the bridge between a good company and a good investment is the price you pay.
If you are able to find good companies in largecaps at the right price, they offer better risk-reward opportunities compared to midcaps and smallcaps.
Which sectors are you currently overweight and underweight on?
Broadly, in terms of themes, as expected from my earlier comments, we are more bullish on largecaps than midcaps and smallcaps, so we are looking for ideas in those areas. In terms of sectors, over the last two years, certain themes or sectors have performed extremely well and have reached very high valuations.
For example, tech sectors have seen significant re-rating upward. Order books are good and healthy, but these factors are already priced in. Now, we need to see execution, margins, and cash flows in these companies.
On the other hand, consumer sectors are sitting at very attractive valuations, so we like consumer discretionary and are overweight on that sector.
We also like defensive growth sectors, such as consumer staples and pharmaceuticals, where we are seeing spurts of growth. Rural demand is doing well, benefiting FMCG.
In pharmaceuticals, as you and the viewers may have seen, last night the US Congress passed the Biosecure Act, which clearly opens up more opportunities for Indian pharma companies in contract research, manufacturing, and drug development. So, we are very positive on pharmaceuticals.
These two sectors—staples and pharmaceuticals—are defensive growth sectors, offering visibility of growth, and their valuations are attractively placed.
In terms of underweight, we are underweight on certain capex sectors currently. IT is underweight. Financials are also underweight overall, but we may be tilted more toward private banks rather than NBFCs and public sector banks.
You have seen many market cycles, and many investors usually get stuck here – whether to hold money or deploy fresh money at current levels. What should investors do if they plan to deploy fresh capital?
I understand that there are two types of investors in the market today: those who look at market prices and get worried, and those who look at market prices and get excited. For an investor, the edge over a trader is the longer-term thinking.
Over the long term, equity markets have historically generated good wealth for investors. If you have a longer-term perspective, corrections appear as opportunities rather than threats.
Traders or leveraged investors, who trade with high margins, may face significant losses even in a small correction.
The first and most important part of investing in the market is to have a long-term perspective. After a strong rally, you can expect good returns over the long term, but your return expectations should be a bit more muted.
Do not expect the same kind of 40% returns that the market provided last year. Equity markets will give you better long-term returns than fixed-income instruments, but it’s crucial to have a strong asset allocation plan that accounts for the volatility of asset classes.
I’m not suggesting timing the market in the short term, but rather to be greedy when others are fearful and fearful when others are greedy. A solid asset allocation plan should take into account how assets have moved historically, their volatility, and create a strategy accordingly. Don’t worry about corrections—use them.
As Robert Shiller says, “A correction in a bull market comes like a thief in the night.” It’s very difficult to time, but you can prepare rather than predict. Keep a certain amount aside to increase your allocation if there is a correction in the market.
Which sectors look undervalued or like contrarian buys at current levels?
It’s typical in markets that when the crowd gets excited about one theme, sector, or set of companies, valuations can rise quickly. At the same time, there are themes, stocks, or sectors that get ignored because they may be going through a temporary slowdown.
If you find good structural stories temporarily experiencing a slowdown, they can become very good contrarian buys. However, a contrarian buy doesn’t mean it will start performing well immediately. Stocks also need a trigger or news flow to lead to a re-rating. But for a patient investor, contrarian bets generally give a good payoff.
At this point, for example, in the banking sector, many private banks, except for a few at their median valuation, are trading below their average valuation. You can find good picks in that area.
Although this year might be slow because we are seeing credit growth slow down and deposit growth is also quite slow, there is value in the banking sector.
Look at other sectors like pharmaceuticals or consumer discretionary. Many companies in these sectors are available at attractive valuations because they weren’t considered “hot” sectors last year, with attention focused on sectors like railways and defense. Consumer discretionary and pharmaceuticals offer attractive opportunities to find good ideas.
We are bullish on chemicals over the long term, although we see some near-term challenges. Chemical stocks have moved up from very low levels, delivering decent returns over the past year or so.
The runway is long, but it is a cyclical sector, and prices are influenced by factors like data from China. In chemicals, you need to be highly selective, as each company has its own portfolio of specialty or generic chemicals, so careful selection is key.
How should one pick stocks, especially when the market is trading near record highs?
I would use a cliché statement, unfortunately, that the easy money is done. You have to be very careful now because most of the sectors and companies with good growth opportunities have also been priced high.
So, you have to be very, very careful in selecting companies at this point in time. It’s not easy. However, as I said, you can decide which area of the pond to fish in to find some attractive bets.
Large caps are one area. Domestic sectors are preferred compared to export sectors. Sectors that haven’t performed well in the last couple of years in terms of stock price movement but have seen good profit growth are areas to pick from.
Quality as a theme has underperformed value for about four years now. So, many quality companies with good ROCEs, ROEs, and cash flows are available at attractive valuations.
A little bit of contrarian thinking and looking for fundamentals where companies are going through a short-term challenge are the areas to go fishing and hunt for ideas.
What is your take on the recent IPOs launching their issues? Any interesting names or businesses that you have spotted?
The good thing is that we are still getting companies with strong fundamentals coming out with IPOs, which is why you’re seeing a good response to them.
Right now, yes, the markets are at higher valuations, so many of these IPOs are also coming at higher valuations, and they’re getting listed at higher than their issue prices.
I think there was a SEBI report that said most investors want to hold for one week after listing and then sell. But I would say, right now, in a bull market, a lot of companies will still come out with IPOs. At some point, you will find that the companies coming for IPOs are at a higher valuation than an established, listed company.
You’ve seen this in businesses where peer companies that are already listed come in with higher valuations. So, be careful at that time. It’s better to go with companies that have a proven track record.
It’s difficult to generalize about IPOs, but one needs to be cautious about valuations at this time. As Seth Klarman once said, in a bull market, IPO stands for “It’s Probably Overpriced.”
The market regulator has cautioned investors about SME IPOs, but the industry has a different take. What are your views?
At Bajaj Finserv AMC, we don’t look at SME companies or SME IPOs. But some of the stories I’ve read in the media are shocking. The kind of doubling on listing and the over-subscription multiples they are getting is worrying for someone with my experience in the market.
When the regulator cautions investors about certain areas, it should be taken seriously. Some traders might be looking at flipping IPOs for quick gains, and I don’t have anything to say to them. But for investors looking for good businesses, I would advise being cautious when there’s so much euphoria around SME IPOs.
Just be careful and don’t generalize. I’m not an expert in that area, but when the regulator issues a warning, it’s wise to pay attention.
Let’s talk a little about valuations. Are we expensive when compared to EM peers at current levels?
In terms of our macro setup, growth forecast, corporate sector, and the diversity of corporates contributing to the earnings pool, India definitely deserves a premium over the average emerging market valuation.
Given the size and opportunity India offers, it justifies a valuation premium. The question is, how much of a premium? In the large-cap space, because the market is at its intrinsic value or fair value, you will find that, in a basket of 100 large caps, roughly 50 are green (opportunities) and 50 are red.
With little effort, you can find a green or an opportunity to make money. In mid-caps and small-caps, valuations have run up very high. I’m not saying any small-cap should be rejected because it’s overvalued, but in a basket of 100 small caps, likely 80 are red and only 20 are green. So, it’s harder to find a green.
You’ll need to put in more effort to find that opportunity the market hasn’t fully priced in yet. If you approach it with a probabilistic mindset, especially in large caps, there are still many opportunities.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
