Investing in mid and smallcap has its own share of risks. Their ability to create long term compounded wealth is lower than largecaps.
Given the excess global liquidity, foreign portfolio investors (FPIs) should return to India but there are other competing countries which may attract a larger share of FPI money than what we have received in the past. However, the rider is if they see genuine recovery in India only then will we see large inflows, till then we don't see extraordinary inflows coming to India, Jimeet Modi, Founder & CEO, SAMCO Securities & StockNote said in an interview to Moneycontrol's Sunil Shankar Matkar.
edited excerpts:
Q) Banking & financials were the actual leaders of the recent rally. What does it indicate? Do you think the worst is over for these sectors?
A) The main reason banking and financials sharply bounced back after the lockdown was because they had fallen the hardest in the recent mayhem and therefore a bounce-back was natural. Nonetheless, this rally may not sustain as there is little clarity on the extent of bad assets in the moratorium book and that clarity isn't going to emerge before September's quarterly results as RBI relaxed norms for asset classification.
Additionally, PSUs too are capital hungry and given the recurring dilution in this space, they might not witness outperformance for at least the next two quarters. Going ahead, we might not see confidence returning in these sectors and therefore they are expected to perform in-line with the market with a downward bias.
Q) The market has picked up momentum in the last two weeks and reached near 3-month high. Do you think this is just a short-term rally?
A) Indian markets have moved in tandem with global leaders like the US but the ground-level situation in all countries is different. The US has done a fantastic job by sanctioning loans of around $377 billion as a short-term stimulus to small businesses.
While in India as far as numbers available for loan disbursements by PSUs to MSMEs (as of June 5) go, it is $1.1 billion. There is a major difference in the macros of US and India and therefore the ground level response will not be the same.
However, stocks are moving in lock stock and barrel together which will sooner or later face a reality check. This seems to be a short term rally and sooner or later markets should head lower to align with ground-level realities.
Q: Do you think the government and RBI will announce more measures in the coming months?
A) This will be an ongoing process given the circumstances. As and when the situations unfold, the RBI and government will respond accordingly. The need of the hour seems to be the unorganized labour and migrant problem whose safety net is of utmost importance.
Q) The rally seems to have also been backed by FIIs which bought nearly Rs 14,000 crore in the first week of June. Do you think FIIs flow will continue going forward?
A) The current analysis of FPI inflows show us that they have not made secondary market purchases with the same aggression as earlier and the money has been mainly invested in block deals of Kotak Mahindra Bank, HDFC Life, Bharti Airtel and the likes. These are India's best quality businesses but FPIs have not committed capital to broader secondary markets in general.
Given the excess global liquidity, FPIs should return to India but there are other competing countries which may attract a larger share of FPI money than what we have received in the past. The rider is, however, if they see genuine recovery in India only then will we see large inflows. But till then we don't see extraordinary inflows coming to India.
Q) The midcap and smallcaps also participated in the recent run-up in equal proportion with benchmark indices. What do you make of it?
A) Investing in mid and smallcap has its own share of risks. Their ability to create long-term compounded wealth is lower than largecaps. Also, this pandemic may cause many smaller companies to shut shop. Survival and growth would be deadly challenges for these businesses. Therefore, it would be safer for investors to bet on largecaps rather than risk their capital in the quest of generating alpha.
Q) What are key and new sectors one should look at now, which can create wealth after COVID-19? Also, what are your top five stock ideas which one should have in portfolio now?
A) As the situation is so unpredictable, it would be safer for an investor to maintain a bottom-up approach. The exercise of identifying a sector which will survive COVID-19 might backfire if the company in itself doesn't have the potential to survive this crisis. True wealth would be in identifying companies which are agile and who adopt technology quickly, have low debt, good management and are leaders in their respective sectors.
Q) What would be your advice to new investors?
A) A new investor should maintain a portfolio approach while investing but also keep sufficient liquidity. At such times, it is better to be risk-averse and maintain diversification. Invest in sectors across the economy in a systematic manner for the next 3-6 months. Don't place your money aggressively in 1 or 2 bets in a view to make quick money. Rather invest in quality largecap stocks keeping a longer timeframe in mind. Don't be afraid even if the market moves lower but hold your stocks if they meet all the basic fundamental checks as these very companies will move ahead post COVID-19 as India continues to survive and grow.
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