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Abhishek Jadon, Smallcase Manager & VP, Windmill Capital

In this conversation with Sheetal Agarwal of IIFL, Abhishek talks about strategy that retail investors should follow in current markets. He also explains why he likes specialty chemicals, electric mobility, auto, banking and defense sectors.

November 25, 2022 9:59 IST | India Infoline News Service
According to you, what strategy should retail investors adopt while investing in the current market scenario?
 
As per the World Bank, India is doing well with a projected growth rate of 6.5%. There remains a possibility of slowdown in economic growth due to recession abroad. It is to be noted that inflation in India is being caused due to supply side issues, and will continue to remain high in the near term. However, it is not expected to rise drastically from the current levels.  
 
Investors should try to tilt towards large cap defensive stocks in times of recession. Large cap companies have stable cash flows and well defined business models. Defensive sectors like FMCG and healthcare services usually tend to be stable across business cycles. We have also seen that stocks from these sectors tend to be of high quality. Such companies are able to weather economic slowdown very well.
 
Avoid investing lump sum amounts and use the SIP method to get the benefit of rupee cost averaging. Invest in fixed income securities like bonds and gold to protect your portfolio from drawdown. Most important thing about slowdowns and recessions is that nobody will be able to precisely predict how long they last or the extent of their effect on stock markets. Not panicking and sticking to basics will help investors. Investors can also look for asset allocation portfolios or hybrid funds in such times rather than allocating heavily towards equity.

How can retail investors allocate savings across asset classes and sub-asset classes?
 
Between equity, debt, commodities, cryptos Indian investors can take exposure across multiple asset classes and sub-asset classes.
 
Against the backdrop of current market conditions with Russia-Ukraine war, increasing interest rates across globe and increasing COVID cases in China, it is preferable for one to look at asset classes that are slightly conservative, in order to mitigate risk. The measure of risk is asset volatility. Essentially, a more volatile asset (viz. equities) tend to fluctuate more than less volatile assets (viz. debt and gold).
 
Even if one is looking to tap into equities, they could look to take exposure to large cap funds, ETFs, REITs which are generally less volatile as opposed to smallcap or midcap segments. It is also prudent to stick to sectors which are not cyclical in nature or which have structural tailwinds behind them especially for the next 5-10 yrs.
 
A new and exciting passive investment option for Indian investors is smallcase. Smallcases are portfolios of stocks or ETFs, that track a theme, strategy or objective. They are created by professionals, each smallcase is a ready-made basket of stocks/ETFs that reflects a theme, strategy or objective. It also helps to take exposure to multiple asset classes in a single portfolio.
For debt, investors can look to invest into low to medium duration funds to avoid interest rate risks currently emanating from rise in interest rates.
 
With all the negative scenarios being built around the crypto asset class along with recent market shaking examples of Luna-Terra, bankruptcy of FTX  etc, it is preferable to avoid this at the moment. Also tight regulatory headwinds exist in India around cryptos and taxation wise also it is inferior to all other asset classes.
 
Bullion commodities like gold, silver are relatively stable at the moment but demand for steel, metals like aluminum looks shaky. Reasons being high COVID cases in China. Even Brent Crude Oil is down by 15% over the previous 3 months.

Which are the key themes/sectors you are bullish on? What are the reasons for the same?
 
Specialty chemicals -  The sector is set to benefit from China + 1 strategy and possibility of coverage under the PLI scheme. The Indian chemicals industry has the opportunity to present itself as an alternate destination for production of major chemical raw materials.
 
Electric mobility -  The government’s push has moved the needle and a lot of incentives have been provided in order to nudge the common public folks to buy an EV. This is definitely an interesting space to look at, with major infrastructure development taking place. 
 
Infra - A strong impetus from government policies is one of the main growth drivers for the infrastructure industry in India, coupled with a strong capex environment.
 
Auto - The pain points around the supply side have been easing out for automotive manufacturers. On top of that the demand pipeline for auto companies is very strong, which is an additional factor to have confidence in this sector.
 
Banking - Strong credit off-take in tandem with rapid asset quality improvement is a deal maker for the sector. Deposit rates have also been healthy for major private players. It is expected that the banking sector will continue to ride on the tailwind of asset quality, less provisions, and strong credit offtake.
 
Defense - India’s military spending is the 3rd largest in the world with the FY23 Budget pegging it at ~$54 billion. Until 5 years ago, we were largely importing our defense needs. However, things have begun to turn around. The government’s focus has shifted towards indigenization, wherein domestic players are not only servicing domestic orders but also exporting overseas, which explains the surge in exports. 
Which are the key themes/sectors you are bearish on? What are the reasons for the same?
 
We are not bearish on any sector at the moment from a long term perspective but some concerns exist for the IT and commodities sector.
 
Indian IT companies have heavy exposure to global markets, especially the US, UK, Euro Zone which are under serious recessionary pressures. As a result, mass layoffs are being undertaken. Moreover, due to the lackluster business environment, firms are delaying their IT spends, which is hurting the industry.
 
Because of the rising COVID cases across China, commodity demand is showing signs of weakness and this may impact the demand for steel and other ancillaries. Crude oil price drop is also suggestive of the tepid scenario amongst commodities.

What is your take on ESG investing? Do you suggest considering ESG factors before investing in a company?
 
ESG investing is a concept which is picking up pace across the global financial markets and we are seeing a decent amount of capital flows coming into the funds tracking ESG compliant companies. We still think it is at a nascent stage in India and will still see some time before a substantial investor interest builds into it. This is corroborated by the fact that even though NSE has introduced an ESG index, currently very few AMCs have made a portfolio out of the ESG concept.
 
Windmill Capital takes governance aspects very seriously and thoroughly checks before adding stocks to our smallcases. We have developed a proprietary quality score which we use to shortlist stocks of quality companies. This score considers aspects like management effectiveness, financial strength, earnings quality and earnings variability. 
 
In addition, we also look into promoters' pledge and do not include stocks with high pledge. That being said, it is fairly difficult to incorporate environmental and social factors into our decision making, given the nature of our markets.   
With so many IPOs lined up in the next few months, how do you identify good companies?
 
Investing in a stock is buying stake in a business. Just like one would not invest in a business that one does not understand, one must not invest in stocks of companies whose business investors cannot comprehend.
 
Study the financials of the company and compare it to financials of an established player to understand how the new entrant is doing.
 
If the new entrant is doing well, attempt to understand the competitive advantage it has over its competitors.  
 
Is the company over / undervalued and whether it is the right time to buy into the stock? Last but not the least, understand whether the stock aligns with the investors risk appetite and preferred investment style.

How should retail investors identify an IPO which best fits their investment needs?
 
In addition to the above mentioned factors, consider the below as well when applying for an IPO:
 
Considering that the markets are expected to remain volatile, refrain from investing into IPO’s with the idea of making a quick profit on listing day. Such a short time horizon depends only on market conditions and is very risky.
 
Another factor to consider in an IPO is the purpose behind raising funds. Read news reports / prospectus to understand where funds will be used. This will help understand the company’s strategic direction. A retail investor must look at the type of IPO - Fresh Issue or Offer for Sale. Fresh Issue basically means that the money being raised is going directly to the company coffers and can be utilized for further development. However, in the case of Offer for Sale, money goes to existing shareholders (usually corporations and HNIs) who sell their stakes to you and me.

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