says Richa Agarwal, Senior Research Analyst at Equitymaster.
In an interview with ETMarkets, Agarwal, said: “Focus on businesses with longevity and a margin of safety, rather than whether you will make money or lose it over next 3 months or even a year. And stick to long-term investing” Edited excerpts:
After a strong July where do you see markets for the rest of 2022 and any important data points to track?
With so many variables, I would avoid taking any short-term view of the markets. My investment philosophy is growth at reasonable prices (GARP) and I have always recommended stocks from a long-term perspective.
So, I would be more focussed on company specific fundamentals and valuations rather than short-term market movements.
Nonetheless, some metrics we would be tracking would be inflation rates and the businesses’ ability to maintain margins, Sensex PE, smallcap to Sensex ratio, rupee’s strength wrt dollar and its impact on different sectors.
We would look at markets from a long-term perspective if they offer good entry points to stay invested for at least 3 to 5 years.
Where do you see the rupee headed in the near future? Any data points that investors should track?
India’s trade deficit is at record highs and with more Fed rate hikes coming, rupee is likely to remain weak.
Keeping a track of FII’s money flow and Fed’s stance on rate hikes would be key influencing factors for the rupee’s movement against the dollar.
Shareholding data seems to suggest that FIIs might be selling but raising stake in some of the midcap companies. Although the broader market underperformed benchmark indices in recent past, do you think it is time to increase weight in small & midcaps?
FIIs are increasing stakes not just in midcaps but in select smallcaps as well. This is an interesting metric to track but should not be criteria to invest in stocks.
The correction in some of the well-run mid and smallcap companies has indeed been sharper than benchmark indices.
Yet, smallcap index is at a level higher than the peaks in the previous rally. I believe it would be better to not wait on the sidelines but take staggered exposure.
What are your views on auto and realty? Both these sectors rose in double digits so far in July?
The auto sector has been under pressure over the last few years. This was compounded by the pandemic, increase in commodity prices, and semi-conductor shortage in the recent times.
We expect the road ahead will be relatively smooth, and this will be aided by an enabling environment with PLI schemes.
We would be selective in this space with a bias towards players that are EV agnostic or participating in this electrification and semi-autonomous driving revolution.
In real estate too, we are mainly focused on residential real estate. The sector is witnessing a revival after years of stagnation. Both bookings and launch statistics are healthy.
Work from home and hybrid working models are likely to support the revival. The sector is a lot more consolidated now. This is positive for the listed companies in the space.
While demand is not an issue, for individual players, the ability to manage supplies (land inventory, approvals, and timely execution) will be critical.
Companies with relatively thin margins, and where construction costs are higher as a percentage of revenue may witness margin compression amid an inflationary environment, especially in the lower end of the market. So again, one needs to be selective in the space.
What is your take on June quarter earnings which have come so far? Do you see earnings taking a hit in rest of FY23?
Well, most of the earnings data, especially for mid and smallcap companies is yet to be announced. For the ones that have announced, while things look decent on the topline front, the margin pressure is visible for different sectors barring banks. But this is on expected lines, and we would not be surprised to see the pressure in the next quarter as well.
While short-term uncertainties are likely to weigh on quarterly earnings and market sentiments, we believe that this is a time to be selective.
There are quite a few companies in the packaging, textiles, chemicals, and pharma space where long-term fundamentals look good and share prices have witnessed corrections bringing quality stocks into the affordable zone.
We are getting some Rs15000 cr every month in SIPs. This is an encouraging sign which also signifies that retail investors are now more confident and informed. Retail investors have replaced FIIs to become the backbone of D-St. How do you see this pan out in near future?
The post pandemic rally has seen a lot of first time and new investors in the markets, who have never lived through downcycles.
A lot of gains in this rally were made on speculative bets – loss-making new age companies, IPOs, and penny stocks.
With that background, despite the correction and volatility, retail investors maintaining SIPs is indeed a positive trend.
We believe that this is a trend that will gain momentum in the long term supported by rise of the young and working class and financialization of savings.
Where is smart money seems to be moving in the rest of 2022?
FII flows so far have and are likely to follow interest rate hikes. The net flow during the year has been negative. However, there are stocks across diverse sectors such as textiles, capital goods, mining, chemicals, food stocks and ER&D that have witnessed buying interest from FIIs.
DIIs have pumped money in the markets, and we believe this trend will continue. The sectors that are likely to witness buying interest include banking and finance, pharma, IT among others.
India’s investment Cycle is showing nascent signs of revival. Which sectors will benefit the most from the CAPEX recover?
With Capex revival, key sectors that stand to benefit include infra and construction – power and energy, capital goods, logistics, auto, and banks.
Are there any initiatives you have taken to help investors to make a better investment decision, as well as give them a secure interface to trade?
Through our regular communications- through videos, print and social media we are insisting our readers and subscribers to focus on bottom up approach, to be prudent with asset allocations, to consider stocks for long term and to stay away from speculative bets.
We have recommended to neither be fearful nor greedy, but to be highly selective with their stock investments. We continue to recommend stocks with staggered exposures through our recommendation services.
Finally, what is your mantra of picking winners for portfolio? Is there any specific parameters you see before making buying or a selling decision?
We are not macro experts. Considering how economic experts have spectacularly failed at their jobs amid a dynamic environment, we believe in focusing and putting efforts on what we can control.
Most of the macro factors turn out to be noise anyway in the long term, with company-specific fundamentals having a bigger influence on stock performance.
For us, the management quality, growth prospects, balance sheet health and return ratios of the companies we invest in our factors we do not compromise upon.
We believe in having margin of safety at the time of buying and have never fallen for Buy at any price rhetoric. We invest for the long term- starting with a horizon of 3 to 5 years.
Even if the market sentiments weaken or stocks show correction in a downcycle, the understanding of the businesses helps us to avoid the panic and not press the panic button on correction.
I have stuck to this approach for more than a decade. And it has done well, delivering a long-term IRR of 26.8%. To sum up:
Ignore the noise. Focus on the micro. Invest only what you can afford to lose. There are still managements and promoters building businesses for the long term and solving real problems.
There are industries which are riding tailwinds and companies whose product and services are critical for their clients. Focus on businesses with longevity and a margin of safety, rather than whether you will make money or lose it over next 3 months or even a year. And stick to long term investing.
When it comes to selling, it depends. If there is any issue with the management quality, we exit. We are relatively less focused on valuations than at the time of buying, unless it’s a cyclical stock.
There are multibaggers we continue to hold despite target prices being met as we see them in a structural growth trend. In short, the sell decision is taken on a case-to-case basis.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)