As I understand, contrarian investing is putting money in sectors/companies that other investors are unwilling to bet on. Is this broad definition correct? What sectors or companies would be contrarian buys in the current market?
Contrarian investing can be defined as investing in an out-of-flavour asset class and/or investing in an out-of-flavour sector/company. It is investing against the popular trend. In the current market, aviation, textiles, textile machinery, gems and jewellery, real estate, shipping, hotels & tourism, logistics, chemicals & fertilizers, oil refiners & marketing, etc, can be considered as sectors that are not very much in flavour. While stocks in these sectors have seen their prices rise in absolute terms, on a relative basis (relative to in-flavour sectors), they have underperformed (save a few exceptions). Just some words of caution here — investors would do well to ascertain the reasons for this underperformance before investing. The stock could have underperformed due to changes in management, government policies, competition, internal policies, currency, etc. Some of these changes may have altered the fundamentals of the company.
Of the sectors mentioned above, one can consider investing in select stocks from sectors like real estate, hotels & tourism, logistics, fertilizers & oil refiners.
Can you explain why mutual funds stopped accepting fresh money in arbitrage funds some time back when volatile markets throw better opportunities? Why do these funds give higher returns in falling markets?
Arbitrage funds do well in volatile markets. The markets tend to be more volatile when they are in a range-bound zone. They tend to have a clear trend when they are correcting after an over-bought or an over-sold scenario. In clearly trending markets, there are sporadic opportunities for arbitrageurs, at an unprofitable cost of carry. Hence, it is not surprising that mutual fund houses stopped promoting arbitrage funds due to a clear trend in the market and a concomitant reduction in arbitrage opportunities. Now that the markets have reached a range-bound zone, more and more funds could be expected to re-focus on arbitrage funds.
What are your views on small- and mid-cap stocks?
They have done really well in the past one year but there are regular reports that valuations in this segment are stretched. Small- and mid-cap stocks underperformed their large-cap peers when the markets corrected, but have now outperformed on a re-bound. There are scores of stocks in these categories that have an excellent track record, sound management, strong balance sheet and valuation that is strikingly attractive, despite the seemingly large price rise in the last six months.
There are several stocks in this category that are available at attractive earning yields and at a discount to their book values. With the economy on a re-bound, the growth trajectory could be stronger in this category. Hence, for an investor with a longer term investment horizon and a slightly higher risk appetite, it makes a lot of sense to invest into some nuggets in small- and mid-cap space. However, a caution here, these stocks tend be volatile and hence could give some anxious moments to those who monitor prices on a daily basis.
Paras Adenwala is the managing director &
principal portfolio manager of Capital Portfolio
Advisors.
Send your queries at yourmoney@bsmail.in
Disclaimer: The author may have interest in some of the sectors mentioned.