What a month for investors – Sensex, and Nifty clocked gains of over 5% in a single month. Do you think the worst is in the price and the only way to go for markets is higher in the medium term?
In the last one-month domestic equity markets have risen by 10%+, virtually reclaiming the levels which were last seen four months back (end of March 22) and beginning of the calendar year (Jan 22).
The key challenges that markets faced during the last 4-6 months were mainly on high commodity prices (inflation) and interest rate hikes by US FED and followed by other countries’ central bankers. This also leads to the US Dollar strengthening and most of the other currencies including the Euro & UK Pound depreciating quite significantly.
But in the last few weeks, there has been a significant amount of cool-off in commodity prices across the board – Steel, Non-ferrous metals, agri-commodities and even the last man standing the Oil prices have also now gone decisively below Us$100. Clearly, the trends are suggesting the worst of inflation seems to be behind us.
In the recent US FED commentary (after the hiking of interest rates by 75bps), there are indications that from here on US FED may not be in a hurry to increase rates, rather would watch the ground level data and revisit their strategy ahead.
The other big challenge that domestic equity markets faced was of aggressive FII SELLING during the last fifteen months (from April ‘21 to June ‘22 ). But the data now suggest that a significant portion of the intensive selling by FIIs seems to be done.
So now that the two big challenges, the inflation, and intense FII selling are behind us along with very decent Q! FY23 results from most of the sectors probably give a reason for a decent sustainable bounce over the next few months.
• The US Fed raised interest rates by 75 bps in July and guided for another round of tightening in the next policy meeting. Stability in US economy comforted equity markets across the globe. What is your take?
Like I mentioned earlier, in the recent US FED commentary (after the hiking of interest rates by 75bps), there are indications that from here on US FED may not be in a hurry to increase rates, rather would watch the ground level data and revisit their strategy ahead.
The 10 Year Treasury yields in the US have also cooled off quite a bit, almost down to 2.55% levels from a high of 3.5% and very close to the current rate set by US FED at 2.3%. So from that perspective, the markets seem to stabilizing and probably may see very measured movement both on the interest rates and currency side
• How are you evaluating risk-to-reward for Indian markets, especially after a recent rally? Investors who were waiting for Nifty50 to fall towards 14000 might have missed the bus again and now we will see more FOMO that could take markets higher. What are your views?
We believe the outlook for the Indian economy is on a solid footing, particularly now that the run-away commodity inflation seems to have retraced quite significantly.
Q1 FY23 results clearly suggest that consumer on the ground is still very confident and continues to spend therefore the aggregate demand seems to be moving on a positive trajectory. The companies have also managed their cost structures quite efficiently to take in stride the raw material cost push and limit the impact of the same at operating profit levels. We are also seeing a decent amount of traction in capital goods businesses, clearly indicating that Corporate India is in good shape both by higher capacity utilization and also planning for new CAPEX.
• There is a lot of scrutiny on the new-age companies. Some analysts have gone out and said that they are no less than ponzi schemes. What are your views?
To say that all new-age businesses are Ponzi schemes is a very arrogant statement. We have to respect the new age business promoters for identifying the problems/needs of consumers and then offering them solutions, which consumers have not only accepted it but wholeheartedly embraced it. Therefore as investors, it is very important for us to keep an eye on where the consumers/customers are queuing up.
We have made one investment in a new age business – Zomato.
Zomato offered a solution by being the bridge between the needs of the consumer and offering scalability/distribution to manufacturers (restaurants). Zomato is a disruptor in the food business, albeit offering a win-win solution
In our opinion, a successful modern tech company can transform industries, achieve expansion of scale, and make enormous profits, all without requiring significant capital investments. Zomato typically has most, if not all of the following features.
• What is your take in small & midcap space if someone is looking at investing from a 3–5-year time period?
There is always opportunity in small and mid-cap space, as Indian entrepreneurs are very hard-working, and dynamic market opportunity allows them to create success stories. From that perspective, there are always bottoms-up (stock-specific) opportunities to invest in mid and small-cap space. Also, there will be some large trends emerging, when some of the efficiently run companies in that sector tend to do very well as soon as they get some tail-wind for their businesses.
Just to give an example, in our small-cap focused Emkay Emerging Stars Fund (AIF Category III) we have so far delivered Total Returns of 80%+ over the last 4.5 years) v/s BSE SMALL CAP INDEX up only 37.5% over the same period.
• What is your take on FIIs outflows which have now slowed down, especially in July? Do you see a reversal anytime soon? How does it compare with the likes of China, Brazil, etc?
There was aggressive FII SELLING during the last fifteen months (from April ‘21 to June ‘22 ). But the data now suggest that a significant portion of the intensive selling by FIIs seems to be done.
(Can you please relate my quote over here with the data on FII selling we had attached)
• In case global does go through a recessionary phase – how do you see India? Do you think we are well placed to handle recession and which sectors are likely to get impacted the most?
We believe the Auto & Auto-Ancillary sector, Pvt Sector Banks, Logistics and Telecom sector should do quite well. Even for industries, which are more export facing and where Indian entrepreneurs have proven capabilities of Indian cos in sectors like IT services, Speciality Chemicals, Pharma (CRAMS), Industrial machinery, Textiles, and recently electronics, there is a decent amount of orders flowing to capable companies.
• How has your PMS, AIFs performed this year amidst the market fall, what is your market cap and segmental focus?
We have been fortunate to have a very good year so far, actually, our focus on quality management and quality businesses has paid off. Our small-cap focused Emkay Emerging Stars Fund (AIF Category III ) as of June 30th, portfolio return during the last six months was virtually flat (-1%) vis-à-vis benchmark small-cap index returns of negative 16-17%. The outperformance since inception (January 2018, 4.5 years) has expanded even further, the NAV (since inception) is up by a whopping 65%+, whereas the BSE 250 Small Cap Index is up a mere 8.3% and BSE Small Cap Index is up 24.5%.
Our PMS Portfolios have also done well, in fact, some of them are in Top ranking (last 1-year performance) compared to the peer group.
Sachin Shah
Fund Manager, Emkay Investment Managers Ltd.
Sachin is a seasoned fund manager with over two decades of experience in the Indian equity markets. By virtue of his extensive research, Sachin realised early-on the need for a framework in which companies with evasively tricky standing needed to be filtered out very objectively, leading to the development of E-Qual Risk, EIML’s proprietary module which helps us to evaluate and compare listed companies on various aspects of governance. Sachin shares his knowledge and insights through various media interactions across print and digital platforms.
