Unmesh Sharma, Head of Institutional Equities, HDFC Securities, who is a CFA charter holder and alumni from IIM Lucknow, said easy money has already been made in the markets, but even now opportunities exist.
Sharma has about two decades of experience in the capital market
In an interview with Moneycontrol’s Kshitij Anand, he said the ongoing trend of relative value hunting will continue and we have adjusted weights as we look for economy-facing sectors and valuation convergence plays.
Q) Markets seem to be on steroids as Nifty surpasses 16700 while the Sensex surge past 56000. What are your view on the market and the way ahead? Time to turn cautious or ride the euphoria?
Unmesh Sharma: If one looks at the recent move in the markets, this would seem like the obvious conclusion. Indeed, as a house, we believe that easy money has been made in the markets. However, this is not to say that opportunities don’t exist.
We believe the ongoing trend of relative value hunting will continue. While our sector preferences have remained largely unchanged in the past six months, we have adjusted weights as we look for economy-facing sectors and valuation convergence plays.
Q) US Fed minutes caused a knee-jerk reaction on D-Street in the week gone by. The world has got used to easy money now. How will it impact equity markets across the globe including India?
Unmesh Sharma: The market is caught in a tug-of-war of counter pressures. On one hand, we have concerns about inflation, Covid 19, and geopolitical issues. On the other hand, is global liquidity.
As is to be expected, second-guessing the Fed amongst other central banks has become a full-time profession. Indeed, every move from their side will be closely watched.
We think that trying to predict short-term moves is a mug’s game. We take a step back and look at the medium term. We believe that inflation concerns are transitory as we remain in the midst of a multi-decade deflationary trend driven by technology.
In addition, the jury is out on whether the demand pulse delivered by globally coordinated central bank measures is sustainable. Hence, trying to predict if the taper will start in late CY 2021 CY 2022 or indeed CY2023 is futile.
In this environment, our Research team believes that it will remain a stock pickers’ market in FY22 with bottom-up positive risk-reward investment ideas still available.
Q) The recent price action suggests that smart money has started money from small & midcaps towards large caps? What are your views?
Unmesh Sharma: Our model portfolio and stock picks are market-cap agnostic. As discussed earlier, relative valuations are at play, and hence in some cases (for eg. IT and Autos), our preference has shifted towards the large caps at the margin. However, this is a valuation convergence call not driven by market cap.
For the last 2 months in fact, we have been cutting weights in and asking clients to book profits in a staggered manner in small-mid caps, Chemical, and IT sectors.
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?
Unmesh Sharma: Indeed, he has inspired an entire generation of investors. Even amongst those who do not agree with the Berkshire Hathway philosophy, one must concede that Mr Buffett’s ideas have had a marked impact on the investment process.
For me personally, one quote attributed to Mr Buffett stands out “Beware the investment activity that produces applause; the great moves are usually greeted by yawns”.
As far as value investing is concerned, the concept’s demise has been announced many times in the last two decades. However, it seems to find its way back just as you pronounce it dead. I believe that Value Investing is not losing sheen.
As with all concepts, it is evolving and leaving behind traditional measures of value such as Price to Book. In a world where ‘knowledge’, ‘network effects’, ‘data’, and ‘intangibles’ do not show up in the balance sheet, I think a cash flow based value investing process can still be successful.
Q) So where are the money-making opportunities in this market? 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?
Unmesh Sharma: As mentioned earlier, our Research team maintains a bias towards economy-facing and value sectors.
Markets continue to favour technology (IT services, internet) and export-oriented sectors (chemicals) compared to domestic cyclicals (banks, autos, industrials) which is leading to the readjustment of index weights away from financials.
The economy-facing ones like select banks, cement, infrastructure, real estate, utilities, PSUs, and gas stocks still have room for rerating.
Within IT, we prefer the large caps and would add weight in insurance and capital markets stocks. Small-Mid cap IT and pharma look fairly valued with earnings-driven upsides.
We remain underweight on consumption (staples, discretionary and autos) given stretched valuations, NBFCs, and small banks.
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?
Unmesh Sharma: We have been Underweight on the Autos space. We saw no earnings-based triggers. This was confirmed in the recently concluded earnings season as well. Valuations provided no comfort.
Thematically, while the EV disruption is not an immediate-term concern, it is top-of-mind for investors. With headwinds on all aspects, we have maintained the Underweight stance for Autos in our model portfolio. We have a small (albeit UW) position in OEMs and one Auto Ancillary.
Q) What is your investment mantra before picking stock for investment?
Unmesh Sharma: We look for inspiration outside of investing textbooks. As legendary football player (Johan Cruyff) once said “First the basics have to be in place, and it’s only then that you can make improvements”.
We follow the same bottom-up approach – look for earnings delivery with strong moats which help tide over transient concerns. This is what has helped our Institutional Research model portfolio outperform the index by 1,350 bps in the last 12 months.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.