India appears like an oasis in a volatile global market: Trideep Bhattacharya, Edelweiss AMC Given that Indias fundamentals are in better shape, our valuations are on the higher side relative to other regions. This reflects in the relative outperformance of Indian markets," says Trideep Bhattacharya, Edelweiss AMC
Given the country’s economic outlook, Indian equities should have a lion’s share of the asset allocation in any investor’s portfolio, Trideep Bhattacharya, CIO-Equities, Edelweiss AMC tells ET Wealth.What do you make of the market’s big swings in recent months?
India appears an oasis in a volatile global market. Global central banks are grappling with the quandary of having to choose between higher interest rates, lower inflation and managing currency in a calibrated manner. This is leading to unprecedented actions. The global macro situation is fairly volatile. US is dealing with four-decade high inflation, Europe with fragile demand and China a volatile housing situation. In this backdrop, the Indian economy has a few things going in its favour that keep it in good stead. The story for domestic cyclicals looks particularly robust. Given that India’s fundamentals are in better shape, our valuations are on the higher side relative to other regions. This reflects in the relative outperformance of Indian markets. Having said that, the headwinds from Western inflation, interest rates and demand scenario is causing some spillover on domestic markets in terms of absolute return.
Given the fears of recession in the West, what spillover do you expect for the Indian economy?
To understand this, we have to divide the businesses listed in India into two categories— domestic-focused businesses and export-oriented businesses. The export-oriented businesses could see some impact in the next 6-12 months given what is happening in the global economy. Domestic-focused businesses and particularly, domestic cyclicals, are the ones which will continue to do well going forward.
Which sectors or themes do you find attractive now? What are you staying away from?
We are constructive on Indian markets from a 3-year perspective. In the near term, we see it as a relative value market rather than absolute value market. From a medium term perspective, our positive stance revolves around a few themes. We are positive on private sector investment demand. We expect a healthy private sector capex cycle to come through over the next 3-5 years. To finance this capex cycle, we see the lending financials sector to have brighter days ahead. In other words, we believe the rebound in the credit growth has more legs to continue uptick going forward.
We believe Indian household capex or real estate could likely be in a sustained upcycle over the next 3-5 years. In this context, we are positive on direct and indirect plays on real estate. While we have limited options when it comes direct real estate plays, we believe indirect plays like building materials sector could be a meaningful way to play the sustained uptrend. We also expect rub-off from some of the government’s schemes like PLI and indigenization of defence as well as China-plus-one demand could result in a sustained and medium-term uptick in the manufacturing sector.
Finally, we are positive on consumer facing companies with pricing power. We believe these companies will likely be able to sustain price increases and maintain strong earnings growth going forward. These are the five themes we are playing across portfolios. The stocks aligned to these themes will do a lot better than others. We have mostly avoided the high-valuation businesses. We are relatively underweight on consumer staples, IT services and utilities.
What are your expectations from the mid and small cap space?
Investors should position their portfolios in line with the asset allocation that is commensurate with their return objective. For risk-averse investors with time horizon of 1-3 years, we would recommend flexi cap funds, while for investors with time horizon of 5-10 years and higher risk appetite, we would recommend mid cap and focussed equity funds that capitalises on bottom-up stock picking, because we strongly believe India is a bottom-up stock pickers’ market. To smoothen out volatility in current equity markets, we would advise investors to invest in tranches and not lumpsum.
Edelweiss AMC does not run a value fund. With the style in favour, are you seeking opportunities in this space?
While we don’t run a value fund, the investment framework we use to pick stocks has valuation parameters embedded in it. This makes our portfolios oriented towards companies which give us valuation comfort. We follow “FAIR” investment framework for picking stocks in our portfolios. In essence, we are bottom-up investors and interested in “financially clean” companies that can grow “sustainably” over the medium-term. Further, we are interested in fundamentally “robust businesses” that not only grow but can maintain good profitability and return ratios through the business cycle. Finally, they should be available to us at an “acceptable price”.
Of these, the “acceptable price” pillar focuses on valuations and is an important part of our process. More specifically, we focus on picking stocks which have an upside of 20% or more to our estimate of Intrinsic Value. We apply this rule strictly and so our portfolios are oriented towards businesses which have good fundamentals but also have valuations in their favour. So we have a value mindset embedded in our framework, even if we don’t run a dedicated value fund.
What is your advice to investors now?
Today investors have the option to invest not only in India but across various countryfocused funds. Valuations in some of the other global markets might certainly look cheaper today. But over the next 3-5 years, given India’s economic outlook, we think that India has a strong bottom-up case and hence Indian equities should have a lion’s share of the asset allocation. Also, the themes we discussed earlier are very bottom-up or company-specific. Rather than focus on macro trends, it is time to be company specific as macros are likely to be fairly volatile. Returns will come from being bottom-up in stock picks.
This story originally appeared on: India Times - Author:Tax Cognition
