Best to stick to companies that deliver; avoid bottom-fishing, says Apurva Sheth of SAMCO Securities

Edited Excerpts:

The market is still consolidating despite falling sharply since the Israel-Palestine conflict began. Why is that?

The Indian market has already corrected almost 4 percent since the conflict between Israel and Hamas started on October 7. With geopolitical risk increasing, there has been a flight of capital from riskier assets. Foreign Portfolio Investors (FPIs) have sold equities worth ₹10,754 crores on a provisional basis since the conflict began.

Do you believe the market is not fully pricing in the impact of this conflict?

Markets have their own sweet way of pricing in the impact of these conflicts. The 4 percent movement that we have seen in the Indian equity market may look like the impact is not priced in. But if you look at the international gold prices, you will realise that they have been rocketing higher from the day the conflict erupted. Gold is up by 10 percent in just 20 calendar days. It is one of the fastest moves in the shortest time in gold we have seen since Covid lows.

Another major factor to focus on is the foreign investor outflow. Why has there been a reversal of trend? Will the selling continue for the remainder of 2023?

With geopolitical conflicts rising, the risk premium attached to equities has gone up. US 10-year bonds are also witnessing selling pressure. This has pushed the yields higher. Hence, equities are believed to have become less remunerative while bonds have become more attractive leading to an outflow from equities.

Till now, are you satisfied with the September quarter earnings?

So far, the September quarter earnings have been reasonable. The numbers from the BFSI space are really good. Numbers from IT companies have not been up to the mark while the outlook and guidance they have given is not good too. Hence, we have seen the downside in IT stocks.

What investment strategy are you following amid this decline to safeguard your portfolio?

Geopolitical risks and rising US bond yields are major worries for global financial markets. We recommend investors to limit their exposure to equities and start increasing exposure to gold and long-tenure debt as we are close to peak interest rates. The allocation to gold and debt should gradually increase as we move closer to Lok Sabha Elections next year.

Is this the right time to look at contra bets?

No, we would advise to refrain from taking contrarian calls at this moment given that we are likely to see an increase in volatility going forward. It’s best to stick with companies that are delivering consistently rather than trying to bottom-fish.

What is your view on the mid and small-cap space? Is this the right time to buy?

Smallcaps have enjoyed a dream run since March 2023. But it seems that like all good things, even this run is coming to an end. The Sensex to smallcap ratio chart has hit the lowest levels last seen at the peak of the smallcap bull run in 2018. When this ratio is rising, it means Sensex stocks are outperforming. When it is falling, it means smallcap stocks are outperforming. This ratio has touched a 15-year low which suggests smallcaps have limited scope for outperformance now.

Which sectors are you bullish and bearish on from a medium-term perspective?

We like stocks from the auto, banking and capital goods sectors from a medium-term perspective. We would prefer stocks that are trading at reasonable valuations and have good growth potential from these sectors. Rising energy prices can negatively affect oil & gas companies which don’t have much pricing freedom, especially the oil marketing companies. A rising dollar and recessionary fears in China and the USA could put metal stocks under check for the medium term.

Which is the best asset for long-term investing, according to you, and why?

For Indians, equities are the best asset class as it has delivered the best returns in the long run. Equities have generally given a CAGR of 12-14 percent over the long run which none of the assets have given. However, gold too has given decent returns over the last 20 years. Sensex and MCX Gold both started their journey in January 2004. Today both are trading above 60,000 levels. The price return that gold has delivered is almost the same compared to Sensex but the risk is far lower. The maximum drawdown in Sensex was about 60 percent in 2008 but for gold, it’s about 30 percent only. Thus, you are getting similar returns for half the risk in gold on your long-term investments.

One piece of advice for new investors?

Asset allocation is the key for all – new as well as experienced investors. There is time to hold equities and there is time to avoid it too. Similarly, it is true for gold, fixed income, and other asset classes. Knowing when to enter one particular asset and how much allocation be made to each one of them, is the key to generating long-term wealth.

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Updated: 27 Oct 2023, 04:17 PM IST