Generally, one should be agnostic of whether a stock is a largecap or a midcap/ smallcap while building a portfolio.
"The risk-reward does not look favourable at this point in time given the recent run-up, expensive valuations, poor macros etc. However, Mr Market is pinning its hopes on speedy vaccine-approval, fiscal stimulus on the domestic front, rural/agri demand, pent-up demand and quick normalization of earnings. So one will have to see as to how the story unfolds," Prasanna Pathak, Head of Equity at Taurus Mutual Fund said in an interview to Moneycontrol's Sunil Shankar Matkar.
Q: How should the allocation mix in equity now consider a sharp rally in mid and small caps? Should fund managers increase bet on these stocks or should they play safe with higher allocation to large cap stocks?
A: Generally, one should be agnostic of whether a stock is a largecap or a midcap/smallcap while building a portfolio. The opportunity size, leadership positioning, growth visibility, management bandwidth/execution capability, balance-sheet strength, ability to generate cash-flows and valuations should matter the most. Quantum of allocation may depend on liquidity criteria for some fund managers, especially for smallcaps. Otherwise, we tend to look at stocks which are superior on above described criteria and showing good earnings momentum.
Q: As we are focussing more on Atma Nirbhar Bharat, what are sectors one should invest in as a part of equity portfolio and why?
A: Atma Nirbhar Bharat and Make in India are currently just a potential story. Not much has happened yet at the ground level. However, some sectors like Chemicals, Pharma, defence and certain manufacturing companies are better placed if the story unfolds.
Q: Lot of brokerages are tying up with global investing firms to offer their customers an investment opportunity in global stocks like Google, Amazon, Apple etc. What are your thoughts on this theme and how much percentage one should allocate to global stocks in a portfolio?
A: I think people have started marketing the global theme and certain stocks as they have done exceedingly well for the last few years. However, I think the juice might be already over with respect to their outperformance. I will assign a higher probability of India and other emerging markets outperforming over the next three-five years.
Having said that, a global allocation does help as different markets/ asset classes have different cycles. One needs the bandwidth to identify these cycles and opportunities and also to manage currency risks.
Q: What are risks one should consider before investing in global stocks? Also what are the biggest risks ahead on the global as well as domestic front given more than 50 percent rally from March lows in equity?
A: As described above, one needs to understand the country and the respective stock/asset class before investing. Also, different markets/ asset classes have different cycles.
The global rally in the last four-five months is primarily driven by liquidity. Hence, withdrawal or reduction of liquidity support is the biggest risk. Second wave of infections, delay in vaccines, delay in earnings normalization, expensive valuations, US elections, geo-political events are the other sources of risk.
Q: Do you think the market has to correct now given the over 50 percent rally seen from March lows or will the market continue its uptrend, why?
A: Difficult to say. The risk-reward does not look favourable at this point in time given the recent run-up, expensive valuations, poor macros and other risks mentioned above. However, Mr Market is pinning its hopes on speedy vaccine-approval, fiscal stimulus on the domestic front, rural/agri demand, pent-up demand and quick normalization of earnings. So one will have to see as to how the story unfolds. That said, in the short-term, markets are a slave of liquidity and flows. You cannot fight that.
Q: Auto has seen a sharp run up in the last few months following monthly sales data amid unlock process and June quarter numbers. Should one invest in auto now or wait for correction, why?
A: There are some segments which are better placed here. The tractor-segment is doing good on the back of good monsoons and strength in the rural economy. The 2-wheeler should do well as there is a need for increased mobility within a low-budget. Also, there are hopes on scrappage policy and other policy measures to boost demand. However, the bigger picture here is that of disruption on how the electrical vehicles take-off happens and who will benefit.
Q: FIIs' monthly inflow in August 2020 has been the highest in the last two decades? What does it indicate given the current scenario and government measures? And what are those sectors/segments getting more FII investment?
A: There has been an unprecedented infusion of liquidity by the global central banks since April. FII flows have been a function of global liquidity. In fact, we were a laggard in the sense that we started getting major inflows only after June 2020. So we are doing a catch-up. FII money has been a very unreliable source of money in recent times. Look at record inflows in January/February 2020 and the subsequent dumping in March. FII has tended to be short-term and trading oriented in recent times driven largely by hedge funds, automated trading systems and arbitrage opportunities.
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