ETMarkets Smart Talk: 30-40% of the market has become attractive: Arun Malhotra

“30-40% segment of the market has become attractive, while there is some downside still expected in small caps and midcaps,” says Arun Malhotra, Founding partner & portfolio manager at CapGrow Capital advisors.

In an interview with ETMarkets, Malhotra said: “Some part of the speculative market (read smallcaps and midcaps) may see some more downside as they lack fundamentals and were driven more by hope stories and liquidity,” Edited excerpts:

We started off July on a strong note and there is some reversal that we are seeing in commodity prices. Can we say that the worst is in the price now? What is your take on markets?
The price correction has been happening for over 6 months now across sectors. While the fundamentals have not deteriorated, the sentiment has turned bearish.

The lower prices have made valuations quite reasonable. The quarterly commentary for a lot of companies has been encouraging and long-term investors are pitching in with their purchases for decent returns over the next 12- 15 months.

The market should be range bound till October-November when a lot of haziness around Ukraine crisis and inflation would subside.

In terms of valuations how do we stand when it comes to historical long-term averages for Nifty as well as for midcaps and smallcaps?
30-40% segment of the market has become attractive, while some downside is still expected in small caps and midcaps.

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Largecaps, especially the banking sector have become very attractive. Underlying demand continues to be very strong in the domestic economy while we may see some margin pressure across companies in the current quarter.

All this should stabilise by 3QFY22. The Nifty is around 18x P/E and is reasonable as compared to historical ranges.

Some parts of the speculative market (read smallcaps and midcaps) may see some more downside as they lack fundamentals and were driven more by hope stories and liquidity.

FIIs seems to be on selling spree, but how long do you think retail investors or DIIs can hold the fort? We have seen at least the trading activity has come down in the last 3-4 months.
The FII selling should be nearing an end, while the domestic inflows into equity continue to be very strong. The SIP into MFs is 10,000 Crs+ and is providing support, while the retail investors are not leveraged and willing to buy in case the market and prices fall.

The volumes have come down as markets have been drifting down, and the day trader has gone away since daily profits are not there. The market is also directionless and hence not a profit-making opportunity for the day traders.

Some good news from the MF front. A total of 17.92 lakh new SIPs were registered during June. The SIP AUM at the end of June 2022 stood at Rs 5.51 lakh crore. The SIP amount has increased from Rs 10,000 cr to Rs 12000 cr every month. Do you think we could scale past Rs 15000 cr by the end of 2022?
The equitization of Indian financial markets is happening, with retail investors choosing the MF route and investing aggressively in the downturn. The percentage of equity ownership is going up.

The retail investors have reaped returns by investing in downturns, especially during covid times, and are extrapolating that mindset.

The SIPs are going to increase only, and this is a structural shift as investors are shying away from real estate and FDs.

What is your take on the rupee? Do you see it crossing 80-81 in the current financial year?
I don’t see it further depreciating from the current levels in the near term. That 80-81 is the upper limit as per our understanding.

The rise in the U.S interest rates will put some pressure here but India should be the least impacted among all emerging economies.

What is your take on June quarter earnings? Which sectors will be in focus, and which one could be laggards?
Key interesting data would be to look for companies that were seeing pressure from rising commodity prices. Commodity prices have been softening and hence should provide some respite.

We see positive results from Banking, while Pharma will be company specific. Chemicals should report good results while we may see margin pressures in IT.

IT may still see some strong aggregate demand as well as deal wins. Cement may be moderate to negative while Telecom and Auto should post decent numbers. Media sector results might be a little weak on lower advertising.

How should one approach the markets – bet on defensives or the high beta names?
One should start adding risk to the portfolios. As commodities correct, the narrative for inflation will change in the next three months, aided by a higher base as we move later in the year. One should be adding high beta names.

Growth as a theme has outperformed in the last one/three months from the oversold zone. However, for a longer duration (1Yr and 2 Yr.), the Value theme has been the most dominating theme in the market. Where to put your money?
We love growth and would stick to it. Valuations have also become reasonable as both time and price correction has happened.

Stocks in the financial sector, the likes of

Ltd, Kotak are back to price levels that existed before Covid, while the profits have risen by more than 40%.

A lot of large-cap names exhibit this phenomenon and have become cheaper both in absolute terms due to rising profitability and constant price levels, as well as cheaper in relative terms to the broader market.

How do you pick stocks for investing? If you can help us with 3-5 rules?
Investing is not complicated, and we try to simplify it by sticking to strong balance sheets and identifying the drivers of change in companies that are run by capable Managements.

We try to identify companies that are leaders in their space and have a sustainable competitive advantage with a long runway for generating superior capital efficiency.

Do you think cool off in commodity prices with lead to a sharp reversal in equity markets?
Rising commodity prices have played a spoilsport as it has led to inflation in the economy leading to rising yields and a tough macro environment for investments, and also impacted the P&L as higher raw material costs are leading to a contraction in margins.

A cool-off in commodity prices will definitely help equity markets, and we may also see a change in expectations of a steep hike in interest rates that everyone is expecting in U.S markets.

Currently, the main worry is the deteriorating macro due to rising interest rates and an impending recession in the U.S, and a softening in commodity prices will definitely help ease those fears.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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