Situation has improved but we are still not out of the woods: Vinit Sambre

Navigating the market has been a challenge as good quality stocks are expensive and cheaply-valued are not finding enough takers, says Vinit Sambre, head of equities, DSP Mutual Fund. In an interview with Samie Modak, Sambre says investors with a five-year horizon have good buying opportunities in several sectors. Edited excerpts:

The going has been tough for the mid and small-cap stocks. What has been the key learnings? How have you navigated some of the challenges?

The correction in the mid- and small-cap stocks was overdue, given the overheating which the category had seen towards the end of 2017. We were quite worried because of expensive valuations then and had also decided to permanently shut our DSP Small Cap Fund for any new subscription. With this correction in the mid- and small-cap category since the beginning of 2018, the excesses have cooled off to some extent and there is some sanity in valuation now. During this down-drift, we saw good quality companies defended themselves well and were less impacted. The recent volatility has strengthened our belief that mid- and small-cap category stocks tend to remain risky and have higher mortality rates. 

How does the valuation differential between mid and large caps look like? Does it make sense to move out of large caps and into mid and small caps?

The correction has resulted in a convergence of valuation between these two categories. The category looks well placed in terms of valuation. At the same time, good-quality companies have not corrected much and, hence, the valuation comfort is still low here. Nonetheless, for long-term investors, this is a good starting point. Moving allocation from large caps into mid and small caps should be a matter of an individual’s risk profile and broader asset allocation strategy. 

What has led to the risk aversion towards the broader market?

Other than a few segments, such as FMCG, select NBFCs and a few private sector banks, most segments of the economy are showing signs of a slowdown for the past few quarters. This has led to risk aversion towards the broader market. The reason for the slowdown is linked to the tight liquidity situation post the NBFC crisis last year, poor sentiments, and lack of wage growth and job creation. 
 

Do you expect this trend of only a few stocks/companies doing well to continue? 

The polarised behaviour of the stock market is currently being witnessed across various economies globally as well. Investors are chasing good performance and companies which are doing better are being bid up disproportionately. While it is difficult to predict how long this trend will continue, good companies within automobiles, health care, cement and building material, and agriculture inputs are reasonably placed on valuations and provide an opportunity to invest. 

Are the economy and the market out of the woods? What are some of the key macro trends that are playing out?

We may not be out of the woods fully. However, the situation is much better compared to a year ago. The liquidity situation has improved, we have had a good monsoon after many years, festival demand has provided some fillip to the demand momentum, and the most important being the government’s recognition of the malaise and willingness to take appropriate action. We expect these factors to aid in a gradual revival of the economy. 

How should an investor play the market at this juncture? What are the key themes/sectors that look attractive? 

Investors investing into an equity-oriented asset class need to realign their objectives in line with the true nature of this category, which is to be volatile in the short term, and that long-term returns track the core fundamentals, mainly earnings growth and return on capital employed. Both on growth and capital efficiency matrix, India tends to present good opportunities to investors who have the appetite to invest for more than five years. The biggest confusion which most investors seem to be grappling with is the fear of investing in an expensive category because of the valuation premium and the risk of underperformance due to allocation elsewhere. We believe with time these anomalies will get addressed as what is quite expensive on the one-year forward earnings basis will not look so over a longer period and further as cycles turn, other categories will also catch up. Hence to mitigate this confusion, we advise investors to invest with a long-term horizon. In terms of themes, good companies with a strong historical track record, good long-term growth outlook, and reasonable valuation are available in sectors such as automobile, banking, health care, cement and other building materials.

The markets are near their highs. How do valuations look at this juncture? Do you expect the markets to extend gains or they will move in a tight range for the next one year?

I would like to refrain from giving any prediction on the market range over the next one year as it would be of little value to investors who are looking at the long-term picture.