Tejas Gutka, Fund Manager, Tata Mutual Fund, said that even as markets have scaled new highs, we are not overly pessimistic about the direction of markets. On the contrary, we hold a constructive medium-term outlook on the markets, so long as growth does not disappoint from here on.
Tejas comes with a rich and diverse experience of over 14 years in the equity and fixed income markets. Prior to joining Tata Asset Management, Tejas worked for over four years with Tamohara Investment Managers where he led the investment team and managed the flagship long-only small- & midcap portfolio – Tamohara Long Term Equity Strategy.
In an interview with Moneycontrol’s Kshitij Anand, Tejas said that the ideal strategy always is to hold a diversified portfolio and focus on asset allocation rather than entry and exit. Timing, as enticing as it is, is an extremely challenging endeavour.
Edited excerpts:
Q) Market hit fresh record highs in May. What is your outlook on markets for 2021?
A) Our view is broadly constructive on the market. We currently do not see any signs that make us cautious from a cycle perspective.
First, we are coming off a slow growth period of many years. Thus there is no over-heating of the economy.
Second, corporate balance sheets have been repaired over the last decade, and as a result, there are no signs of excessive leverage or over-capacity in most sectors.
Third, at a retail level, while borrowings have gone up, there are no signs of over-leveraging yet.
And, lastly, while valuations are above average, they remain well supported by the low bond yields. More importantly, India’s valuation premium over other emerging markets at 40-45% is within the acceptable range so far.
Thus, even as markets have scaled new highs, we are not overly pessimistic about the direction of markets. On the contrary, we hold a constructive medium-term outlook on the markets, so long as growth does not disappoint from here on.
Our positive view notwithstanding, one can never rule out the possibilities of an intermittent correction. After all, we have witnessed corrections of up to 30% in the previous bull run.
Q) Market is focusing on the unlock trade. But, will the scenario pan out exactly similar to what we saw last time considering that was a total lockdown and we are in partial lockdown?
A) Clearly, given the difference in the extent of lockdowns, one cannot expect an exact repeat of last time. A case in point is the demand for some categories like snacks and biscuits which saw a significant uptick last time around but have been relatively modest this time around.
Having said that, we do expect a rebound in consumer sentiment once things open up. Our confidence stems from the fact the over the last few years, we have overcome a number of hurdles – from demonitisation, to GST implementation, to the NBFC crisis, and finally the Covid induced lockdowns.
Despite these successive disruptions (that impacted businesses as well as consumers in multiple ways), the base demand has held up well.
This reflects the strength of India’s demographic dividend and gives us confidence that demand has been deferred, but not destructed.
On the supply side, Government’s ability to carry through with the counter-cyclical fiscal policy as outlined in the Budget needs to be watched.
We also think that sustained strength in commodities will lead to a revival in the private CAPEX cycle, which has been a critical leg that was missing in the last decade.
These are more medium-term triggers that will keep the markets interested in, beyond the re-opening of the lockdown states.
Q) What should be the ideal strategy now – should one book profits and then deploy cash at lower levels?
A) The ideal strategy always is to hold a diversified portfolio and focus on asset allocation rather than entry and exit. Timing, as enticing as it is, is an extremely challenging endeavour.
It requires being right in two big decisions – the selling, and the subsequent buying. Given that even the best investors average about 60% accuracy in decision making, they have a 36% chance of being right in two successive decisions.
The average investor has even low chances of getting both the legs right. Thus, timing as a strategy has pay-offs worse than gambling, and therefore should be avoided at all causes.
Tactics like profit booking, deployment at lower levels etc. are much better implemented through an asset allocation framework with periodic rebalancing.
For instance, a simple 60:40 equity to debt portfolio that is rebalanced half-yearly or annually will automate the reduction of the asset class which has relatively outperformed and increase of the asset class that has not done well relatively.
Investors would do well to remember that investing is a multi-decade enterprise and only one of the many activities that the investor undertakes (most investors would have a day job that is outside of investing).
You do not want this activity to take up a lot of your mindshare, nor do you want the experience to be highly stress-inducing. When you try to book profits and wait on the sidelines, you will be constantly worried about the short term direction of the market, which is extremely random.
This will take away the energy that could otherwise be profitably deployed into the other enterprises that the investor needs to focus on.
More importantly, the incremental returns from such a strategy (even if executed successfully) are much lower compared to the stress that the investor will experience while undertaking it. At the end of the day, investing is the most rewarding when it is the least stressful.
Q) Which sectors likely to lead the next rally on D-Street? Time for sectoral rotation and look at sectors that remained underperformers?
A) We have seen a pace of sector rotation in the last year that we have probably not witnessed maybe over the last decade. In our view, across the board sector rotation is largely done.
We have already witnessed a change in leadership in the last year, with the top-performing sectors of the last decade having lagged other sectors.
The important takeaway here is that today, most sectors are contributing to growth, unlike the last few years.
We think that incremental rotation will now be within sectors themselves. As growth becomes more broad-based, money will move from the expensive leaders to the relatively cheaper contenders.
To that extent, we will witness some percolation of capital down the order – partly visible in the sharp movements in the mid & small-cap space.
In our view, the way to think about markets from here on is to think bottoms-up.
Identification of businesses with enough growth tailwinds that are not completely captured in the valuation estimates will continue to remain the most rewarding form of investing.
Thus, rather than trying to pre-empt the next sectoral leadership, investors would do well to focus on the strengths and weaknesses of individual businesses.
History has witnessed our collective inability to understand broad sectoral moves. For eg, after the twin towers collapsed, people expected air travel to slow down. We know that is not what happened.
After the global financial crisis, it was assumed that the financial sector will face liquidity challenges and therefore underperform. On the contrary, the infrastructure sector was expected to do well as India would build roads, airports, and ports. Neither of these scenarios played out as expected.
A) The near-term risks to the market will emanate from developments on the virus front as well as global inflation expectations and trajectory.
The impact of slowdown on the fiscal, and hence the government’s ability to spend and undertake tough reforms/privatisation, could also be tested.
Longer-term, markets will continue to remain a slave of earnings and cash-flow growth, and therefore corporate performance will matter more than anything else.
Q) With markets at record highs have you increased or reduced your cash position compared to last month?
A) For us, cash is a function of available opportunities rather than market levels. We do not like to take cash calls based on index levels. Rather, we prefer moving money from holdings that are nearing fair value zones to holdings that offer a high margin of safety.
Our constant endeavour is to evaluate the set of companies that fit into our investment framework (Growth at Reasonable Price i.e. identifying companies with potential for earnings upgrade cycle and/or catalysts for re-rating) for a high margin of safety.
In case we do not find enough margin of safety across the board, then we may increase cash levels. To that extent, we are index agnostic.
Q) Any sector(s) that are looking overheated. For example – brokerage firms such as Credit Suisse as well as JM Financial have reduced their weightage or downgraded metals post the rally. Do you have any specific sectors in which investors can reduce weight or avoid adding new positions?
A) As eluded to earlier, it is extremely difficult to identify large sectoral turning points. In an economy that is coming out of a slow-growth phase, nothing is over-heated if growth picks up meaningfully and is broad-based.
While sectors or stocks could underperform temporarily based on recent price movement and near term business performance, however, if the economy grows at a reasonable pace, valuations normalise quickly.
Therefore, what was expensive in the near term, may not look so in the medium term. It is probably for this reason that the oldest surviving advice on the street is to hold a reasonably diversified portfolio.
Indeed, as mentioned earlier, periodic rebalancing of the portfolio serves as a good risk management tool, forcing you to reduce that which has outperformed and increase that which has underperformed. This works not just at an asset class level, but at a sector/stock level as well.
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