Synopsis
“We think the economy is going to improve, earnings are going to improve and to that extent, earnings growth in the small and midcaps is going to be sharper than the earnings growth in the largecaps over the next two-three years and that is one reason why you have to buy the small and midcaps and keep it because that will give you bigger return in your portfolio.”
“It is true valuations are no longer easy trades. That got played out over the course of 2021 when mid and smallcaps outperformed largecaps by a big margin of 30%. But there is still more room for all the small and midcaps to outperform largecaps and so we continue to be very positive on them,” says Jyotivardhan Jaipuria, Founder & CEO, Valentis Advisors.
What are the factors which are playing off the pressure setting in after a couple of good weeks and days in the market?
We have had a very sharp rally over the last one year. The markets are up 23-24%. Nifty has given a positive return for the last six calendar years and in the history of Nifty, there has never been a seventh calendar year where you have got a positive return. In case of the Sensex, positive return has been seen for a maximum of seven years. So, to that extent, performance wise, probably the market needs a bit of consolidation. But the key factors are going to be two; one is valuations and the other is that central banks are probably going to worry the market over the next few months.
What is the nature of your own portfolio in 2022? How are you looking at under owned sectors like auto, banking? Is there a case for some outperformance on that side?
Where is the value in some of these sectors which have not done well? For the last 18 months, we have been quite underweight on the financial pack but that is the space where we have been adding to our weight continuously over the last six to eight weeks.
The second is we have been keeping cash in our portfolio and so we have more cash levels than we have had for a long time. Now the average cash position is between 15% and 20% in the portfolios to take advantage of a correction.
Third, in auto, we want to add at some point. There is value in auto and we are just waiting and seeing how the semiconductor prices play out. But on the margin, we have been adding autos in our portfolio and we will probably get more aggressive with both auto and financials.
Let us talk about financials a little more in detail. Private sector banks is an area of interest from your perspective or are you also open to looking at NBFCs?
The way I split it is the retail banks and the corporate banks. Obviously there are private sector banks in both the retail and the corporate side. The last 10-12 years has all been about retail banks and whether it is simply the NBFC space or the banking space, the time has come for the corporate banks to do well.
We have seen a lot of provisioning from the corporate banks and to that extent, the need for provisioning in the future is going to come down. Second, with corporate profitability improving, we are probably going to see some of these loans which have been treated as NPLs, starting to come back and they would probably end up paying over the next two-three years which will be another good sign for the banks.
Third, I expect credit growth to pick up because we probably will start seeing some signs of capex spending coming through 18-24 months down the road. All these make, corporate side of lending a very attractive space. Just remember, these have underperformed a lot and generally are not owned much by investors. So they are underperforming, under-owned and as things improve, there will be a rerating there and earnings pickup, both of which will help share prices.
What are your thoughts on the mid and the small cap end of the market? Do you see merit in nibbling into broader markets?
We will be keen. We run one of the best performing small and midcap funds. Our small cap fund was probably number two for CY2021 amongst all the 250 PMS in the country. So we are keen on small and midcaps and we continue to like the space. There are three things which I always look at; first is valuation. The valuation no longer is cheap relative to the largecaps. So in terms of valuation, the easy trade on valuation is gone but the two other trades – basically small and midcaps always do well when the economy improves.
We think the economy is going to improve, earnings are going to improve and to that extent, earnings growth in the small and midcaps is going to be sharper than the earnings growth in the largecaps over the next two-three years and that is one reason why you have to buy the small and midcaps and keep it because that will give you bigger return in your portfolio.
It is true valuations are no longer easy trades. That got played out over the course of 2021 when mid and smallcaps outperformed largecaps by a big margin of 30%. But there is still more room for all the small and midcaps to outperform largecaps and so we continue to be very positive on them. We will probably see a correction and when that happens, we could see a larger correction in some of these small and midcaps. Investors should avoid some of these companies and look instead for companies where there is visible earnings growth.
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