What are your expectations from markets for the rest of 2022?
Barring any unknown risk, we believe that the markets have already formed a bottom. The current valuations are discounting all the known risks. At the same time, investors will be cautious in deploying their funds. Therefore we expect the markets to go sideways through 2022 with a slight upward bias.
Share with us the investment strategy best suited for current markets.
Staying with large caps and large mid-caps is a good strategy since smaller companies will get heavily impacted by market volatility. Investors should not be under-deployed in equity but should ensure that the portfolio volatility is as low as possible.
Large caps or small caps? Which of these are you betting on?
We have a multi cap strategy where we equally weigh the large, mid and small caps. We are slightly biased towards large caps right now but we believe that over the long term investment in fast growth mid and small caps with solid founders and great execution will generate the highest returns for investors.
What makes you bullish on autos and IT services?
Autos are seeing a revival of demand, especially 2-wheelers. The industry has been negatively impacted by a number of factors over the last 5 years and is finally seeing the revival of demand as customers increase their discretionary spends. The industry is also benefiting from a fall in commodity prices specially steel which will help improve margins after a long period of time. In case of IT services we are seeing a continued increase in demand from customers. The margins have been lower than expected in the last quarter which is largely due to front-loading of employee expenses and building of bench strength to counter high attrition rates. We expect the cost pressures, especially the high attrition rates to cool off over the next 2 to 3 quarters and the margins to revert to they are mean levels. At the same time the leading IT services companies have seen a significant correction in valuation in the recent market correction making them a very lucrative long term investment opportunity.
What is your view on FMCG and consumption-related sectors?
Consumption related sectors are seeing a revival in demand also. However customers are extremely price conscious and we are seeing down trading taking place where customers are going for a cheaper option in the same product category. We are also witnessing pretty sharp competitive trends across categories like beauty and food products where companies are willing to sacrifice margins in lieu of market share. Therefore we think that the whole space is in a situation of flux right now and investors should be very careful in making long term bets. It would probably be more prudent to wait for better visibility of who the winners are before making a bet in this space.
Which are the themes that you like? And the ones you are staying away from?
We are quite bullish on the entire CDOM, CMO and CRO space because we see a secular trend of business coming to Indian companies in this space from international pharmaceutical companies. This space also has inbuilt high entry barriers and long gestation periods so it is not possible for new players to suddenly jump into this space. We also like IT services and autos, especially 2 Wheelers. We are staying away from large private banks for the time being because we believe that the peak NIM cycle has already been met and once the higher credit costs kick in we will see pressure on valuations for some of the high priced private sector banks.
Are you considering ESG (environmental, social and governance) factors while identifying investment ideas?
We do consider ESG and want all of our portfolio companies to be ESG compliant.
What are the key challenges facing the markets?
High inflation, the threat of continuous rise in interest rates by global central banks, supply chain shortages due to the war situation in Ukraine and the Covid-19 related lock downs in China are some of the biggest threats facing the markets. However a surprise resolution to any of these issues will not only open up global trade, bring down commodity prices but will also lead to an uptick in markets across the world.
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