Time to think contrarian in market; pick quality over value: Nimesh Chandan

Investors are switching to sectors with strong earnings visibility. We have changed our portfolio towards high allocation to large-cap, says Nimesh Chandan, CIO, Bajaj Finserv Asset Management

A correction in the Indian stock market was long overdue, and the escalation in Iran-Israel war, coupled with surging oil prices, only provided an external trigger, says NIMESH CHANDAN, chief investment officer (CIO) at Bajaj Finserv AMC.

In an email interview with Nikita Vashisht, Chandan says large-caps offer better risk-reward in the current market and investors may undertake contrarian bets for long-term wealth creation. Edited excerpts:

Q) Indian stock markets took longer to stabilise compared to global peers after the Israel-Iran war escalated. What's bothering the markets and what will aid a sustainable recovery?

In the last one year, the markets have had a strong rally, especially in the mid-cap and small-cap categories. Certain themes like Defence and PSUs experienced a sharp upward move in the last 12 months. With valuations reasonably too high in many pockets, a correction was imminent.

 

The geopolitical tension and an up-move in Brent crude oil prices provided that trigger. The Indian economy and corporate sector, however, continue to be strong, and growth remains attractive. After a correction, we are likely to resume the bull market rally. However, we may see a change in leadership in the market with rotation within sectors and stocks.

Q) Should one seek safety of the large-caps in this uncertain phase for the markets?

While it is difficult to generalise in the mid-cap and small-cap categories, one can assess that the category has many companies at high valuations. Hence, the risk-reward ratio is favourable in large-caps today. In the last three months, we are seeing large-caps outperforming mid- and small-caps. Investors also seem to be preferring large caps now.

Q) Are markets worried about more downgrades after Q2 earnings? What are your expectations? What are the key trends that investors should track?

Given the high valuations and investor expectations, there may be some disappointments after July-September quarter (Q2-FY25) results. In recent months, we have seen sharp down moves in companies that experienced any negative development but not a proportionate up move in companies with good news. This shows that markets are pricing in a lot of positives already. The September quarter results are expected to be muted overall.

The sector rotation is also signalling that investors are switching to sectors with strong earnings visibility like consumer staples and pharmaceuticals. Revival in rural growth, improvement in the automobile sector especially two-wheelers, and a slowdown in government capex are the key trends to watch out for. Commentary on the festive season will be keenly awaited.  

Q) Do you expect FII outflows to intensify in future if RBI holds interest rate steady for long?

We believe India is favourably placed among emerging markets and hence is likely to attract foreign flows. We are already seeing positive flows in the fixed-income market due to inclusion in global bond market indices.

With the liquidity and interest rates expected to ease globally, we are likely to see emerging markets, including India, benefit from fresh allocations. In the near term, it is the non-economic cycle factors that can create volatility in flows.

Q) What is your investment strategy to fight the current market downturn? Should investors pick defensive or high beta plays for the next 6-12 months?

In the past two months, we have changed our portfolio towards high allocation to large-caps. Sector-wise, we have increased weightage in Telecom, Pharma, and Consumer sectors. Style wise, we have increased allocation to quality versus value. Investors may look at picking investments which are oriented towards defensive growth.

Q) What asset allocation would you recommend to new investors with high-risk appetite and moderate risk appetite in this market?

Any new investor, entering the markets right now, must think of a long-term investment horizon for investing. Don't anchor on just last year's return to plan investments.

Consider longer-term data of return and volatility in various asset classes and then set expectations. Use systematic investment plan (SIP) or systematic transfer plan (STP) with an aim to benefit from volatility. Think contrarian and consider investments which have good long-term outlooks but are undergoing short-term issues.