More than dips, investors should focus on specific companies which have good growth prospects but are mispriced by Mr. Market, Dr. Vikas V Gupta, CEO & Chief Investment Strategist, OmniScience Capital, said in an interview with Moneycontrol’s Kshitij Anand.
There are opportunities in many companies which are not popular with retail investors or even most DII or FII fund managers, says Gupta who has decades of experience in capital markets provide a scientific approach to equity investments in Global & Indian stock markets. Edited excerpts:
Q) The market is going through some consolidation, but do you think the bigger story is still intact and it is still a good buy on the dips market?
The bigger story is the nominal GDP growth of 15-20 percent in FY22 followed by nominal GDP growth of over 12 percent in FY23. It is likely that we are on a growth path of secular double-digit growth driven by large CAPEX and reforms as announced in the Budget 2021.
There will be a spillover effect on various industries and that is the bigger story. In fact, more than dips one should focus on specific companies which have good growth prospects but are mispriced by Mr. Market.
Q) It is well-known fact that the market discounts everything in advance and this it might have discounted a lot. Do you think that with growth catching up, the market could not take a breather and let numbers do the talking before resuming its uptrend journey?
The market has discounted a lot of information, for sure. The projected PE ratio for Sensex is around 28x and the midcap index is at 31-32x for the projected PE ratio.
We think that the top companies in the Index, whether Sensex or midcaps are looking overvalued and hence they could take a breather.
However, there are opportunities in many companies which are not popular with retail investors or even most DII or FII fund managers.
These are the original, below-the-radar ideas where there is alpha to be made. Those companies will continue getting discovered and re-assessed while the headline market might take a breather.
Q) There is lot of buzz in the financial services space on account of privatisation or merger of NBFCs. How should one play the financial space post Budget 2021?
We would be very careful about the financial services space, such as, banks and NBFCs. We think there is more opportunity in what we call Capital Enablers; we even have a strategy called Omni Capital Enablers.
These are companies that are providing the financial services infrastructure, such as stock exchanges, rating agencies, etc. which enable both debt and equity fundraising.
The large amount of CAPEX in the next five years will be enabled by these companies and this is not recognised by the markets yet.
Q) In one of your notes you have mentioned dividends are divine in ZIRP world. Please shed more light on it.
Under the Zero Interest Rate Policy (ZIRP) across the world, income-oriented investors are finding it difficult to generate reasonable cash flows on their assets. Even in India, it is a Low-Interest Rate Policy (LIRP) if not ZIRP.
Here too, investors are getting yields of 5 percent or less on their bank fixed deposits. In such a scenario, a lot of investors get lured into slightly higher yields on corporate deposits or bonds of lower-rated companies or into unrated or credit-risk funds.
We are suggesting a better way inspired by Warren Buffett’s Guru—Benjamin Graham. Graham suggested that if a company is strong fundamentally, then one should invest in its highest-yielding, typically, junior-most security.
We have taken this a step further and the junior-most security we have in this instance is equity. We have identified around 8 companies that enjoy an AAA-rating (or its short-term equivalent A1+ for one case) on their bonds and which have dividend yields in the range of 7 to over 10 percent with an average yield of the portfolio around 8 percent.
Further, while this being equity portfolio is exposed to all the equity risks, including the risk of dividend pay-outs being different from the past, there is a DIPAM (Department of Investment and Public Asset Management, Government of India) guideline which makes it quite likely that the portfolio as a whole will continue paying high dividends.
Further, these are all companies with large growth opportunities. So there is a high dividend yield combined with potentially large growth opportunities. We think this is an extraordinary situation which will be not be left alone for too long by Mr. Market.
Investors, for whom it is suitable, will have to take action before the opportunity goes away.
Q) 7 consecutive month of outflows from the equity MF schemes tell a story that investors would like to take things in their own hands, especially the ones who can take risks while the risk averse ones continue to follow the SIP route. What are your views?
We think it is right for the SIP investors to continue investing through ups and downs and it is good to see that the Indian investor is finally mature enough to stick to this through thick and thin.
They continued during the March downturn and are continuing today despite the markets being high.
On the outflows from the mutual fund schemes, I think a lot of investors have a perception, rightly or wrongly, that the fund managers didn’t do a good job for them and hence they are pulling out the money.
But, they still don’t need to take things into their own hands; that might prove quite risky once the next crash strikes.
Most such investors might not be able to handle or understand what to do in case the market drops more than 20 percent or so and stays there for a year or two. (I am NOT predicting a crash or anything, but we know that every few years there is an up and a down in the market. That is a full cycle.)
However, there is now an alternative to mutual funds and holding single stocks directly by retail investors. These are curated portfolios on platforms such as smallcase.
These are managed by investment advisors. OmniScience Capital itself has several such portfolios available to investors on smallcase. Retail investors who are disappointed with mutual funds or would like to take advantage of unique thematic ideas can invest via these in a safer manner compared to buying single stocks if they don’t have the expertise.
Q) We have seen a lot of digitisation taking place in every sector amid the outbreak of COVID last year. Can Internet-based companies, insurers be the next wealth creators of this decade? What are your views – if not, which sectors are you eyeing?
Digitisation has accelerated post-COVID. Internet and digitisation are tools to scale mass markets at low cost. But the wealth creation will happen when this is done profitably. Also, the internet is a tool for all companies.
Depending on which of them is able to utilise it better than the competition, will determine who ends up being the bigger wealth creator. In short, the traditional rules of competition still remain. The battleground has changed, and that is the internet.
We are looking at a lot of US-listed companies in that space via our Omni AIoT (Artificial Intelligence and Internet of Things) portfolio.
Also, a lot of Indian IT companies are enabling digital transformation globally and in India. They are the ones we have in our Omni DX (Digital Transformation) portfolio.
Q) The year 2020 saw many good ticket IPOs and the story for the primary market still remains strong in 2021. Can we call it a frenzy amid the abundant liquidity in the system? It looks like whatever you throw at D-Street everything will get absorbed. What is the kind of money you see getting raised in 2021?
IPO frenzy is a classic sign of a bull market. We are seeing IPOs getting lapped up at very large valuations. Sometimes we joke that if a listed company delisted and came back for an IPO they might get many times higher valuations.
Hidden in that joke is the opportunity. There are numerous listed companies that are being ignored by Mr. Market and which could prove to be very lucrative investments.
One has to sift through the market using a highly structured approach like our Scientific Investing framework and zero-in on those opportunities.
With global and domestic liquidity, while realistically, $ 15-$ 25 billion worth of IPOs are likely to happen, it is possible that given the right opportunities even a $ 100 billion worth of IPOs might get absorbed in this bull market.
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