Vikas Gupta of OmniScience Capital
“Most of the known negatives, meaning, US Fed and Reserve Bank of India (RBI) rate hikes and liquidity reductions, global supply chain constraints, high commodity prices, Russia-Ukraine war, general inflation, etc. are priced in,” said Vikas V Gupta, chief executive and chief investment strategist at OmniScience Capital, in an interview to Moneycontrol.
He further said what cannot be priced in at any point in time is black swans which are unpredictable.
At current prices, even with higher discount rates, both Indian and US equities are quite attractively priced, he believes, and it makes sense to start allocating money to them over the next few months.
“Defence, railway infrastructure, and digital transformation (mostly IT stocks with exports) companies, all these will not be impacted by recession at all since their order books are not consumer driven,” Gupta said.
What is the message you got from corporate commentary after March quarter earnings season?
Overall the business outlook is quite confident about growth over the next few years. However, there is some apprehension on account of higher commodity and crude oil prices, related inflation, global supply chain constraints, and increasing interest rates. This could play out over the next few quarters with slightly slower growth and compressed margins in the near term.
But a clear growth outlook over the next three to five years has boosted business confidence leading to large capex plans targeted at capturing growth.
Do you really think the valuations look more reasonable now after recent correction?
Absolutely. The headline Nifty and Sensex PE (price to earnings) itself is lower than what it has been for several years now. Further, if you dig deeper into the broader market, like we do a search in the full market of the top 1,000 companies using the scientific investing framework, you will see that numerous companies with strong balance sheets, persistent competitive advantages, and strong growth vectors are available at significant discounts to their intrinsic values.
Further, Mr. Market’s Myopia or Blindspot is such that there are companies even in the top 10 of Nifty which are mispriced.
I would like to caution that, precisely, because there are numerous companies available, an investor should not just jump in and load up on his favourite company. A portfolio should be diversified across not only sectors and industries but also across growth vectors. Do not fall for loading up on the “next 100 bagger”. Even (Warren) Buffett was happy to buy numerous companies when numerous companies were available cheap in the 1970s and early 80s.
Do not fall for the concentrated portfolio narrative and chasing the 100 bagger. A diversified portfolio allows you to create a 100 bagger portfolio in a much safer manner than a 100 bagger stock. Just for context, Peter Lynch had 1,400 stocks in his portfolio and beat Buffett during 70s.
How can you make your portfolio inflation and recession-proof now?
We have a portfolio of defence companies which have practically no correlation with inflation. The order book is visible for the next five years or more. These companies get most of their orders from the government or defence organisations. Another portfolio is of railway infrastructure companies. These companies again have mostly five years order book visibility.
Then we have a digital transformation portfolio. These are mostly IT (information technology) stocks with exports. Here, it is actually ant-correlated to inflation. Higher the inflation, typically, rupee depreciates. This helps the IT exporters in increasing their competitiveness, revenue and profit growth. Again, as you can see, all these will not be impacted by recession at all since their order books are not consumer driven.
Should one stay away from new age companies that got battered in recent market corrections?
One can start looking at these companies and understanding their business models, etc. If someone gets confidence on their business models and long term advantages, and wants to add some of these to their portfolio keeping in mind the risks, then one can consider that after deep due diligence. One should keep in mind the risks — most of these are negative cash flows over the next several years.
During this time they will need continuous inflows. What is the source of these cash inflows? In a low liquidity environment with the US Fed sucking out liquidity and even RBI following through, where are they going to get cash? If they don’t get the cash how will they survive? There could be regulatory hurdles in case of sectors like financial services.
Keeping these risks in mind, one can consider creating a venture capital-like high risk portfolio for a very small proportion of their overall capital allocation after a deep study and understanding of their own risk profile. One should be willing to lose all their capital in such investments.
Which pockets are looking attractive at this point in time for a portfolio?
We have several growth vectors in our flexicap portfolio, for example, digital banking/fintech/payments, capital enablers, rail infrastructure, defence, power, mobility/EV, infrastructure, digital transformation, metaverse, and housing finance. As we have mentioned, numerous opportunities exist.
Further, one should also look at global equities, especially US stocks. Opportunities are there in artificial intelligence, ecommerce and payments, metaverse, athleisure and fitness, luxury and millionaires, consumer technology, home nesting, etc. So the opportunity is huge. If one has capital to allocate to equities over the long term and has the risk profile then one can capitalise on this opportunity.
Do you think the market already priced in most of negatives or the worst is yet to be over?
Yes, most of the known negatives, meaning, Fed and RBI rate hikes and liquidity reductions, global supply chain constraints, high commodity prices, Russia-Ukraine war, general inflation, etc. are priced in. What cannot be priced in at any point in time is black swans which are unpredictable by definition. Rate hikes over the next several meetings are well known. So the investors are already using higher discount rates. At current prices, even with higher discount rates, both Indian and US equities are quite attractively priced. It makes sense to start allocating to these over the next few months.
Do you expect a downward revision in growth forecast and further repo rate hike with more measures to suck out liquidity by RBI in the June policy meeting?
Yes, growth will be slightly lower than earlier forecasts for 2022. However, if one looks at growth up to 2024 or 2025 the CAGR (compound annual growth rate) shouldn’t be impacted much. Repo rate hikes are a given and liquidity will definitely be reduced slightly — if not in this meeting, in future ones.
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