PGIM India has produced an insightful white paper which showcases what has actually worked in our equity market over the last 20 years.
High quality – high growth companies have been able togenerate higher alpha more consistently on a year-on-year basis over the last 2 decades much more than 3 other sets of companies: high quality – low growth, low quality – high growth and low quality – low growth.
A notable exception was a period from FY21 – FY24 which saw low quality – low growth companies outperform high quality – high growth for 4 years in a row.
Vinay says to understand this unique phenomenon, we must go back to the previous decade of the 2010s – which belonged so much to high quality – high growth companies that by the end of that decade, valuation dispersion had gone to an extreme, resulting in a strong mean reversion playing over the years FY21-FY24.
In fact, the pendulum swung back so decisively and sharply that we now are at the cusp of a reverse mean reversion – where growth has become the new value.
Staying with investing in high quality – high growthcompanies has proven to be the winning style in India over the last 2 decades and will likely continue to be so in future too.
Vinay likes private sector banks – they now look the opposite of BAAP (buy at any price) – AAAP (avoid at any price!) – a great contra signal to consider especially when you see healthy uptick in business momentum.
Among capital market stocks, he makes an important distinction between businesses that depend on F&O activity (exchanges, brokers) and those that build wealth for investors (AMCs, wealth managers). The former are not serving the best interests of the investor and therefore should continue to expect more and more regulatory intervention that cramps their activities, while the latter are building annuity businesses on the back of creating wealth for investors – and therefore have hugely scalable businesses.
Vinay agrees that some growth companies have got ahead of themselves on valuations and reiterates the PGIM philosophy of buying high quality – high growth businesses at reasonable prices.