DAILY VOICE | Euphoria in mid smallcap space can see an impact if recovery expectations are not met: Sailesh Raj Bhan of Nippon India MF

Market Outlook

Sailesh Raj Bhan, Deputy CIO – Equity Investments, Nippon India Mutual Fund, said that growth at a reasonable price and focus on sustainable businesses with a long runway for growth are key driving forces for sustained wealth creation and are important factors for stock selection.

Bhan has over 25 years of experience in banking and financial services in India and the Middle East. He has worked with RBS Group, Franklin Templeton, Bank of America, ABN Amro Bank, HSBC, and Commercial Bank of Qatar in the domains of branch banking, credit cards, asset and wealth management

In an interview with Moneycontrol’s Kshitij Anand, Bhan said that the recent underperformance of largecap space as compared to the mid and smallcap space also makes a good case of reallocation of money towards largecaps given the relatively attractive risk-reward opportunities. Edited Excerpts:

Q) Markets seem to be on steroids as Nifty surpasses 16,700 while the Sensex surge past 56,000. What are your views on the market?

Sailesh Raj Bhan: Equity market rise has been driven by a combination of factors like strong quarterly results by listed companies spread across sectors, global growth recovery, and global stock market performance as well as relative lack of investible alternatives for a large number of investors given low-interest rates, etc.

Given that earnings are getting broad-based and are being supported by a strong recovery in the global growth, the outlook remains positive. However, near-term corrections on account of global factors or the occurrence of further disruption will test the resilience.

Also, market euphoria is visible in the mid and smallcap space which can see a material impact in case rising expectations are not met.

Q) Why it is the right time to keep investment focus in Large cap segment?

Sailesh Raj Bhan: The largecap space which is primarily represented in the Nifty50 has seen material consolidation with top players gaining significant market shares like in telecom, banks, steel sector, etc.

Sectors which were suffering in the last few years like metals, pharmaceuticals, IT services, etc. have seen a material uptick in the earnings growth in the last 12 months and have contributed to market rerating.

Large Cap companies have the ability to deliver market share gains in difficult operating circumstances and that is playing out in the current environment.

Margin expansion is also visible in most largecap businesses which is supporting the earnings recovery.

The recent underperformance of this space as compared to the mid and smallcap space also makes a good case of reallocation of money towards largecaps given relatively attractive risk-reward opportunities.

Q) What is your investment mantra before picking stock for investment? If a person is willing to allocate funds to equities at this point, should he invest in large-caps or mid-caps?

Sailesh Raj Bhan: Growth at a reasonable price and focus on sustainable businesses with a long runway for growth are key driving forces for sustained wealth creation and are important factors for stock selection.

This along with quality management with ambition creates the environment and the right to win and win big.

Given the current market conditions, Large Caps offer considerably favourable risk-reward possibilities.

Q) What has been your strategy to navigate Nippon India Large Cap amid rise in volatility in the pandemic period?

Sailesh Raj Bhan: Differentiated Portfolio created out of high conviction investing has been a key factor of our Nippon Large Cap Strategy. The fund focused on areas where growth was strong, while valuations were relatively attractive.

The fund benefited from its participation in under-owned and undervalued sectors like Engineering, Pharmaceuticals, Metals and Large banks over the last 12 months. Not overpaying for growth and not compromising on the quality of businesses and management have been key aspects of portfolio strategy.

Q) US Fed minutes caused a knee-jerk reaction on D-Street in the week gone by. The world has got use to easy money now. How will it impact equity markets across the globe including India?

Sailesh Raj Bhan: Easy Money conditions continue to be important determinants of PE multiples in the marketplace and hence are important factors driving stock prices. The elongated COVID challenges have led to this getting even more pronounced.

Any major shift in the policy is a critical turning point for the market and will drive volatility considerably higher.

Q) The recent price action suggests that smart money has started money from small & midcaps towards largecaps? What are your views?

Sailesh Raj Bhan: Recent market shifts where largecaps have started outperforming lately over mid and small caps do reflect the shift in sentiment and focus on investors in reducing overall portfolio risk and choosing the largecap space.

Given the sharp underperformance of largecap indices vs mid and smallcap space over the last 12 months, the case of largecaps investing is favourable and reallocation by investors towards this space has been happening.

Q) Warren Buffett will celebrate his 91st birthday on August 30. This legendary investor has been an inspiration for most value investors. Has he also inspired you in one way or the other and is value investing losing sheen in a high beta market?

Sailesh Raj Bhan: Mr. Buffet’s wisdom has been important for most investors focused on long-term wealth creation. Markets continue to go through cycles impacting some strategies differently during different phases.

The earlier thinking on value arguments have given way to “growth at reasonable value” and the focus is on sustainable long-term growth over only pure value measures.

Over time, the core principles of investing like “paying right for sustainable profitable growth businesses” and “cashflow importance” will remain unchanged.Hence despite market gyrations, long-term wealth creation is governed still by the same core principles.

Q) So where are the money-making opportunities in this market?

Sailesh Raj Bhan: Several sub-sectors of the market present opportunities. Some of them are available in sectors like Manufacturing/Capital Goods, Large Banks, Insurance & Credit Card sub-sectors, Power Utilities and Consumer discretionary sectors (which will benefit from opening up of economic activity)

Q) Given the fact that we are trading in unchartered territory – should investors consider rebalancing their portfolio? What is the ideal portfolio allocation at this point?

Sailesh Raj Bhan: After a sharp rerating in the markets, investors should look at asset allocation measures that may have changed considerably based on their own risk profile.

A higher dose of large caps in the portfolio can also be considered give relatively attractive valuations vs sustainable growth prospects of the space.

Q) If we look at the sectors which gained as Sensex moved from 50,000 to 56000 in August – Metal rose 73%, Smallcap was up 40%, Utilities and Power were up 27-37%. Which sectors will lead the next leg of the rally? Do you see some profit-taking n some of these sectors?

Sailesh Raj Bhan: Among the various sectors, Manufacturing/Capital Goods, Large Banks, Insurance & Credit Card sub sectors, Power Utilities and Consumer discretionary sectors (which will benefit from opening up of economic activity) appear more promising give the long runway for growth and relative attractiveness.

Q) Auto was down over 3% as Sensex rose from 50,000 to 56,000. Do you think there is potential in Auto space in the near future as EV space hot’s up?

Sailesh Raj Bhan: Auto has been going through a perfect storm. Factors like raw material prices, high fuel prices, weak demand due to COVID challenges, likely impact of EV on existing business models have all challenged the outlook for the sector.

Clearly, this space is ripe for disruption especially in two-wheeler space, which can create new opportunities for investors.

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