Markets likely to remain volatile next 6 months
Vice President - Investments
DSP Investment Managers
Fund Focus : DSP Equity Fund
WF: DSP Equity Fund’s short and medium term performance has been below par. What are the corrective measures you have undertaken to protect the interests of the investors and bring back the performance on track?
Atul: The macro factors have not been favoring our holdings in the portfolio. We were under-weight on IT and pharma, hence were unable to encash on the rupee depreciation. Further, we had exposure in the oil and gas segment, the increasing crude oil prices remained unfavorable for our holding in this space. These factors contributed to the short and medium term underperformance. As a corrective measure, we have increased our exposure to IT, but we still remain underweight since the sales growth and earnings potential for the sector looks weak fundamentally. The tailwind benefit of rupee depreciation and increased exports will benefit the sector for a while, but may not help in structurally enhancing growth potential. In the pharma sector as well, we have increased our exposure slightly, however, we have retained our core portfolio, given that the conviction from the valuation angle remains intact. Only marginal and incidental changes have been made to the portfolio, we have not made any drastic changes to the portfolio. We believe that the tailwind challenges from macro factors are only transitionary.
WF: Do you think we are now about done with a mean reverting correction and can look forward to resumption of the market uptrend or are we in the midst of a more protracted bear phase in the market?
Atul: Amidst the chaos, there are many good things which seem to be panning out, hence, it does not seem like there will be a deeper correction. Government reforms, earnings recovery and metal stocks, corporate banking stocks have started reporting good numbers on the backdrop of many positive aspects which have panned out over the last 4-5 years. Investors are wary and reducing exposure due to the weaker global cues (macros), the earnings growth remains impressive, hence, I don’t think we may see a deeper correction. Market volatility however will remain high in the coming 6 months given the lineup of various events. Iran sanctions, US elections and Indian elections could trigger a reaction in the market either way. These are happening in the backdrop of increasing interest rates and tariff wars. For the next 6 months or so, the market is likely to remain volatile. By that time, 1.5 years of time correction would have happened in the meantime. Investors are likely to start looking at earnings after they get substantial clarity with respect to the above mentioned events. Post – this the stage will be set for markets to return to lower volatility.
WF: You are under-weight on technology, FMCG and energy – any specific reasons for staying away from these sectors especially when IT seems to be the hot sector of the day and the consumption story seems to be a relatively “safe space” to be in at the moment?
Atul: The stock selection philosophy that we follow does not seem to find the right pick in these spaces. We don’t like some of the largest names in these sectors, and would not like to add them in the portfolio only from a benchmark perspective. The portfolio however, has considerable exposure to the consumer discretionary sector. Some of the stocks are classified as materials, but there is exposure in paint companies, electricals etc., while there is less exposure to staples, there is exposure to other discretionary items. The exposure or no-exposure is purely incidental based on our investment philosophy.
WF: Which are the sectors or themes that you are significantly over-weight on which you think will add to the performance of your fund?
Atul: The portfolio is tilted towards the discretionary stories, we are equal weight (vs. index) in the banking or financial services space, however, within this space there is greater exposure towards retail banking stocks and high quality NBFC stocks. This is one sector that we are positive about. We are also positive on Auto sector. Although, Auto sector is on a slowdown, it is temporary, the cost pressure is not being passed on to the end user. Over the next 2 quarters, these aspects could stabilize and the sector could make a comeback.
WF: You are currently overweight in Midcap (22.74% vs. benchmark 16.93%) and smallcap (12.04% vs. benchmark 4.41%) segment. Was this incidental to your investment philosophy or intended given the correction in the market?
Atul: We have always intended to maintain 65% largecap exposure and about 30% - 35% into midcap and smallcap. The investment philosophy we follow focuses on whether company is worthy of being included in the portfolio as against whether they fall in the largecap or mid / small cap. The exposure is not due to market correction, it is purely incidental to the investment philosophy followed by the fund. Quality stocks, reasonable valuation and good management are things we look out for and continue to hold stocks which look promising irrespective of market fluctuations and market capitalization.
WF: There is a section within the market which believes that quality stocks continue to trade expensive – do you subscribe to this view? How do you propose to tackle this scenario?
Atul: This is the investment style which we reckon, quality at times comes expensive. We focus on valuations and management team, some of the stocks we hold in our portfolio are trading at expensive valuations. Multiples are higher compared to historical averages and relative valuations are on the higher side. The ideal scenario is to have a good mix of stocks in the portfolio and not to go overboard, about 70% exposure is into these types of stocks and for 30% we scout for tactical ideas. This is how we tackle this scenario. The quality stocks are getting wider opportunities and are able to strengthen their market position, given the Government reforms and other such favorable initiatives. Hence, the growth prospects for these stocks remains strong, although the valuations seem to be on the higher side. The earnings growth potential clearly out-weighs the premium paid for these quality stocks.
WF: What is the one advice that you wish to communicate with distributors and investors alike during these turbulent times (on volatility and your strategy on fund management)?
Atul: Due to the correction that we are witnessing, there are considerable opportunities which we are able to identify. This situation can help us re-balance the portfolio, we are using this opportunity to exit stocks where there is less upside potential and average the cost of quality stocks. The quality stocks are likely to recover faster when the markets turn tables. This is the ideology with which the fund is being managed. The economy is doing reasonably well apart from the fiscal deficit, rupee depreciation aspect. The earnings growth is visible and is picking up, the markets are likely to react to this aspect. About 1.5 years of time correction will be over in the next 6 months. This is a good opportunity for investors to invest in a phased manner. It is always tough to predict the peak and bottom of the market; hence a phased investment would help. Atleast, in this stage, the investor should not withdraw the money, they should stay invested. They can increase the exposure over the next 3 months in a phased manner.
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