Aashish Somaiyaa of White Oak Capital says that the midcap segment is ripe with opportunities to generate alpha amid greater inefficiencies that exist in this area.
Somaiyaa is a market veteran of over 20 years. Since 2020, he has been serving as the CEO at White Oak Capital which currently manages over $ 2.2 billion in AUM.
Edited excerpts from his interview with Moneycontrol’s Kshitij Anand.
Q) As we step into the second half of 2021 what are your views on markets? Nifty50 rallied 13% in the first half, do you think the momentum will continue?
A) It is not possible to predict that but I think a lot of people find these levels of the markets unbelievable or unsustainable and part of the fear of heights is coming from seeing the very same Nifty50 at 7,600 a year back.
One should not keep 7,600 as the reference point for where we are right now. We now know that was a sheer panic caused by complete darkness about case fatality rates of COVID-19, lack of vaccine, lack of knowledge of the economic impact, human reaction, and the possible actions of central banks and governments.
It is clear now that we didn’t deserve to go there in the first place. Also, COVID-19 has resulted in the global monetary and fiscal policy stance becoming far more benign enabling India to engender its own economic expansion, for which we otherwise didn’t have elbow room in 2018 and 2019.
It is important to look forward with an open mind and grounding all views in the economic turmoil and markets full of stop-starts of the last 7-8 years will not help.
Q) In terms of IPOs we saw an exciting first half, and now as we enter the second half the biggest attraction would be the Zomato IPO. What are your views on the primary markets for 2H2021?
A) Primary market sentiments have been buoyant over the last few months. In FY21, the net (adjusted for buybacks) equity supply was around US$ 24bn.
A large number of companies have filed their IPO applications with the market regulator and are expected to go public over the coming quarters.
Many of the planned IPOs are in sectors like fintech, food-tech and e-commerce which have seen accelerated digital adoption and improving economics over the past year. Digital adaption was anyway a trend, COVID-19 has only resulted in accelerating the same.
Q) Do you think the recent announcements made by the FM to support the economy are enough?
A) In fact, the government used the COVID-19 crisis as an opportunity to introduce other long-standing ‘growth-enhancing’ reforms including production linked incentives (“PLI”) for manufacturing, more flexible labour laws, and a focus on infrastructure creation and privatisation.
From a near-term perspective, even as the government continues to support the ongoing economic recovery through targeted measures including credit guarantees for the stressed sectors, supply-side reforms continue to remain the focus.
Overall, the supply-side reforms can lift the potential growth of the economy.
Q) WHO has warned of a third wave in Europe and other parts of the world. There are few cases that signal that a possible third wave is here. Do you see more lockdown that could come into play and disrupt the business cycle which would mean that earnings estimates would have to be revised again?
A) There could be downside risks from a third wave and a lot depends on the severity and the duration. Vaccination is the key.
However, as we have seen during the second wave, corporates, in general, are better prepared to deal with the restrictions relative to the last year while the on-ground labour situation also seems to be better, as evidenced by continuing operations at most construction sites.
Also, despite a far higher number of cases during the second wave the lockdowns were less rigorous than what the country experienced in the Jun 2020 quarter. The lockdowns were more targeted, and most manufacturing-related activities were allowed to continue.
Q) What is your call on the small & midcaps. This space has been resilient in the recent past and has outperformed the benchmark indices so far in 2021. Will the momentum continue in the second half as well?
A) At all times we seek to maintain a balanced portfolio to ensure that portfolio performance is driven by stock selection rather than non-stock-specific risk factors such as market timing, beta, sector, or other such factor exposures.
We do not make any top-down allocation decisions on sector weights or thematic exposures. The sectoral or factor weights are an outcome of our bottom-up stock selection process.
In general, from a market cap perspective, while we invest across the spectrum, we find a greater number of opportunities in the mid-cap segment which is highly fertile for an alpha generation due to greater inefficiencies that exist in this area.
The way to look at it is that in our country, there are certain segments or sub-segments or sectors of the market, which are yet underdeveloped or under-penetrated. Hence, some of these leaders are also small and midcap companies.
At White Oak at any point in time, half of our portfolio is multicap, and at any point in time, half of our portfolio is roughly in small and midcap.
But, the way we look at it is that even within the small and mid-cap, what we own is the leadership of any sector or sub-sector of the industry.
Q) Someone said that don’t chase what has done well in the last six months. Do see the underperformers of 2021 making a comeback in the second half?
A) As mentioned above, we seek to maintain a balanced portfolio at all times and we avoid tilting the portfolio on any one axis of the growth vs value, low beta vs high beta, defensive vs cyclical debates.
We do not make any top-down allocation decision on sector weights or thematic exposures. Our investment approach of bottom-up stock selection is well applicable across sectors and market capitalization.
Q) Which are the next big themes emerging on D-Street?
A) India provides a structural investment opportunity with its strong domestically driven growth profile and a profitable and diverse corporate universe. Thus at any point in time, we continue to find opportunities across sectors.
Take the example of PLI which is expected to boost ‘Make in India’ and is a multi-year theme. Already large global companies have announced their plans to set up manufacturing plants in India. In domestic cyclical, we continue to find attractive opportunities in private financials.
The pandemic has accelerated digital adaption, not only in India but globally. There is much faster adoption of technology not only in our day-to-day lives but also by global enterprises.
Indeed what was seen as discretionary in terms of prioritising IT spend is seen as a necessity now. The IT Services sector is in the midst of it all.
Staying with digital adoption, if one looks at capital markets; while Indian households moving their savings and investments into capital markets has been a long trend, the rising push towards digital and DIY has only accelerated the trend and hence we believe all capital markets and savings/investment entities encompassing insurance, asset management, broking, market infrastructure intermediaries, fintech, etc are in an interesting journey.
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