ETMarkets Fund Manager Talk This portfolio fund manager expects H2FY24 to be more rewarding for investors

ETMarkets Fund Manager Talk This portfolio fund manager expects H2FY24 to be more rewarding for investors

While inflation has started showing signs of easing both in India and the US, and there are growing expectations of the rate hike cycle nearing an end, central banks haven’t jumped the gun and have kept the room open for monetary policy tightening.

Therefore, volatility in equities is expected to stay in the near term. However, Aditya Sood of InCred Asset Management recommends investors to gradually increase allocation to equities.

“We believe H2FY24 would be more rewarding for investors as we get past the peak interest rate cycle, and in the interim, investors should use the bouts of volatility to increase allocation to equities ahead of the general elections in 2024,” Sood, the head portfolio and fund manager – InCred MultiCap Portfolio, told ETMarkets in an interview.
Edited excerpts:

After the smart rebound we have seen in markets since April, do you think stability is returning and so is investor confidence?
The near-term buoyancy in the equity markets have been supported by FIIs turning buyers of Indian equities after being sellers for most of FY23.

Global equity flows continue to shift from DMs (developed markets) to EMs (emerging markets) since the start of 2023. CYTD, DMs have seen an outflow of $23bn, mostly led by the US. On the other hand, EMs saw an inflow of $39bn. Market valuations have become more reasonable after large time correction over the past two years. The surprise pause by the RBI in hiking rates has also helped the sentiment.

A section of people in the market believe that 2023 will be a year of accumulation as volatility is likely to be higher. Do you also think so?
There is no playbook for an economy wherein demand exceeds supply and unemployment is near all-time lows, yet interest rates are rising fast, liquidity is draining due to quantitative tightening, and inflation is rampant.

We are in the early phase of inflation declining which is getting reflected in the normalization of raw material cost, freight cost, and declining energy prices on one hand, and on the other hand, a slowdown in the developed world poses a risk that near-term earnings could disappoint.

We believe 2HFY24 would be more rewarding for investors as we get past the peak interest rate cycle, and in the interim, investors should use the bouts of volatility to increase allocation to equities ahead of the general elections in 2024.

Over the last 1 year thematic/sectoral funds have seen strong inflows. Do you expect this category to continue to be in demand?
In a market that has been rangebound, there are themes that would stand out as we have witnessed in the case of financials. The sector saw decadal low credit cost coupled with a resurgence in credit growth, which led to a rerating in the sector. Similarly, auto thematic funds benefited on account of resumption in volume growth in passenger vehicles and commercial vehicles and an anticipated decline in raw material cost. This trend shall continue till the time we continue to have a range-bound market.

What’s your strategy for stock selection in a portfolio if one is looking for an average 10% returns every year?
The core of our strategy is to focus on buying great businesses at a reasonable valuation and focus on compounding returns in high-quality companies and buying good companies at a discount.

These are typically market leaders that have a high market share with a disproportionate profit pool share in the sector.

Our belief is predicated on the fact that great companies use downcycles to transform themselves and bounce back stronger in an upcycle.

In most cases, these companies would have a history of trading at much higher valuation multiples in the immediate past but more importantly, they would compound profits at approximately 15-20%.

We focus on bottom-up stock-picking opportunities by actively focusing on sizing and concentration with a conviction-driven approach. Our strategy also lays emphasis on avoiding the sectors wherein valuations are expensive and staying disciplined across market cycles.

Small and midcap stocks have seen a good rally in the last couple of months. Which pockets have attracted you?
At this juncture, considering high global inflation and policy constraints of the central banks, we favor a bottom-up investing strategy, especially after correction that has been witnessed in smallcap companies.

There has been a divergence that has been witnessed in smallcap vs largecap performance in FY23. Nifty Small cap index underperformed Nifty 50 by 13% in FY23, thus, creating an opportunity. We have a positive stance on financials, healthcare, manufacturing, consumer discretionary and consumer staples.

What are your key takeaways from the March quarter earnings? Which sectors indicate there’s more pain left?
We have witnessed earnings downgrades as far as FY24 earnings outlook stands, led by IT services. IT services results indicate that the macro environment remains challenging, and companies are witnessing a delay in decision-making with some project cancellations.

Banks so far have posted in-line/marginally above estimates with positive commentary on retail loan demand. Asset quality continues to hold strong and credit cost remains low.

However, there are no signs of a pick-up in demand in rural markets. We saw margin improvement due to softening in commodity prices in auto and cement.

Currently, which sectors is your fund house extremely bullish on, and on which ones are you bearish?
We have a positive stance on manufacturing, industrial, healthcare, cement, consumer discretionary, and consumer staples. We have a negative stance on chemicals, IT, ferrous and non-ferrous metals, although IT&ITES companies have declined sharply and would give an opportunity to increase weightage.

What kind of investment approach will you recommend to retail investors if one assumes the interest rate hike is nearing peak?
As inflation moderates and rates peak, we would get into a much more conducive environment for equity investing.

Ahead of the elections, after the consolidation in the market, retail investors should focus on increasing the allocation to equities as market valuations have become more reasonable after the large time-correction over the past two years.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)

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