Largecaps appear reasonably valued: Capitalmind CEO Deepak Shenoy

Investors entering equities should come in with a long-term horizon to ensure short-term fluctuations amid high valuations do not derail the wealth generation, says Deepak Shenoy, chief executive officer and founder of Capitalmind. In an interview with Abhishek Kumar, Shenoy discusses how domestic-focused sectors like manufacturing, defence, railways, domestic consumption, and infrastructure are ready for long-term growth. Edited excerpts:
 

What is your current view of the market? Are the earnings trajectories supportive of valuations?

Largecaps appear reasonably valued, with a price-to-earnings (P/E) ratio of about 23 times, and median earnings growth of 15 per cent year-on-year. Broader markets seem slightly frothy, with P/E ratios over 30x, while earnings growth remains around 15 per cent. Markets always carry some froth. In this context, private-sector banks are perhaps the cheapest, while defence and manufacturing companies, along with a few fast-moving consumer goods players, are among the most expensive. Identifying where the froth is will only become clear as future earnings are reported. Predicting market highs based on perceptions of valuations alone is impossible.

However, the long-term outlook remains bullish. If India’s gross domestic product (GDP) trajectory takes us to $20 trillion or more in the next two decades, markets should perform well over time. Those are the better time frames for planning investments — short-term fluctuations today or tomorrow won’t meaningfully alter that future.

This year, markets have managed to tide over negative surprises, backed by resilient flows. Do you expect the momentum to continue, or do you foresee any headwinds?

The honest answer is that we don’t know. We prefer to respond rather than predict headwinds. Challenges will always exist, such as a possible US recession, a debt crisis in Europe, or a slowdown in China. There’s also geopolitical uncertainty. It’s uncertain whether any of these would slow down Indian markets if they turn into major events. While this may not be a popular answer, one should follow the trend until it bends.

How are your portfolio management services (PMS) portfolios currently positioned in terms of sector allocation?

We are sector-agnostic, but our fundamental portfolios have had relatively less exposure to export-oriented sectors like information technology and pharmaceutical. This could change in the future.

At present, we believe that India-focused sectors such as manufacturing, defence, railways, domestic consumption, and infrastructure will perform well over the long term.

Most of Capitalmind’s offerings are based on quantitative and factor strategies. Will you extend a similar approach to the mutual fund (MF) space as well?

We haven’t yet received the final licence from the Securities and Exchange Board of India. That process will take time. We have many ideas in the pipeline, but they depend on market conditions, regulatory factors, and the environment once we receive our final licence.

The MF space is both exciting and challenging, with potentially increased inflows from retail and corporate investors in India over the next decade. We aim to help investors build long-term wealth, just as we have with our PMS offerings.

How do you view recent listings? How are you approaching them as an asset manager, given that many initial public offerings (IPOs) are debuting at hefty premiums?

In any bull market, there will be IPOs, many of which are overvalued. However, that doesn’t necessarily mean poor future returns — several stocks have generated stellar returns even after being listed at high prices.

As a PMS, we cannot apply for IPOs directly, but we usually track companies for at least one quarter before jumping in. We follow this same approach even if IPOs are listed at a premium. We prefer to see at least one quarterly result before considering them for our portfolios.

For quantitative strategies, a company typically needs to be listed for a year or more to be included in our portfolio screens. In a fundamental qualitative strategy, we evaluate companies based on their track record, fundamentals, growth potential, and valuation — just as we would with more established companies.

Is the MF space becoming overcrowded with so many new entrants? How do you see this playing out in the long term? What will determine the winners and laggards?

There’s plenty of room for both existing and new players to grow. MF penetration in India is still less than 20 per cent of GDP, whereas in developed economies, it’s upwards of 80 per cent. There is ample opportunity for new entrants and existing players to grow as the market expands.

Ultimately, performance and assets under management will determine the winners and laggards. As digital platforms increase mutual fund access for more investors across India, we believe the space will open up, and more players will be able to serve these new investors.

How should investors approach quantitative/factor-based funds?

The approach is the same as investing in any other type of fund. Investors should ask similar questions: Do you understand how the fund managers explain the concept? Are you familiar with the fund manager’s history or approach on past returns? Are you fully aware of the risks involved in such a strategy? Chasing performance alone can lead to disappointment, but over the long term, it’s the manager’s discipline in sticking to the strategy that works. You should only choose a fund if you are comfortable with the answers to these questions.