Dalal Street Voice: Russia-Ukraine conflict brings back focus on auto, financial sectors: Aditya Sood of InCred

In an interview with Zeebiz's Kshitij Anand, Sood highlights that depending on the cycle, one needs to be overweight or underweight on equities as a part of dynamic asset allocation.

It is always advisable to consult an expert before investing.

Aditya Sood, Fund Manager - InCred Multicap Fund said that “Buy Fear and Sell Greed” is our core philosophy which we have followed through multiple cycles by imposing self-constraints in terms of capital returned in great markets and capital deployed in tough markets.

In an interview with Zeebiz's Kshitij Anand, Sood highlights that depending on the cycle, one needs to be overweight or underweight on equities as a part of dynamic asset allocation. It is always advisable to consult an expert before investing. Edited excerpts:

Q) A war-like situation has emerged. It is new to many investors who entered D-Street back in 2020. Is it time to follow Warren Buffett's methodology – be greedy when others are fearful?

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A) In the very short-term, and especially daily, market movement is primarily guided by investor sentiment which is usually influenced by greed, fear, and behavioural biases.

So, it might not be relevant to dissect the equity market on a daily market movement basis.

Q) What does history tell us about various Black swan events which have unfolded in history and what is the key takeaway for investors?

A) The first two decades of the 21st century have been interrupted by dramatic events, some of which were expected and many of which caught us off-guard.

These crises have stemmed from both financial market instability as well as geopolitical events. Either way, they have been both the causes and effects of the underlying trends that have driven global affairs over the last two decades.

One event that shook the modern world and had a sharp impact on financial markets, as well as global stability was the 9/11 attacks and the ensuing response.

Similarly, the Arab Spring, Brexit, the US-China trade war, and conflicts on the Indo-China border have all had a severe impact on financial markets and create periods of extreme fear and uncertainty.

Q) Does it make sense for investors to invest in India now and why?

A) India is certainly in the position to accelerate in the coming years as we are in the process of mean reversion of corporate profits.

The main contributors to the mean reversion of corporate profitability are high tax collection and the reduction in covid related expenses, improvement in capacity utilization, Housing upcycle due to improvement in affordability, and low home loan rates.

This has also coincided with the record low cost of capital for Indian corporates.

Q) When everything is available at a discount what should be stock selection criteria for long-term investors?

A) “Buy Fear and Sell Greed” is our core philosophy which we have followed through multiple cycles by imposing self-constraints in terms of capital returned in great markets and capital deployed in tough markets.

Depending on the cycle, one needs to be overweight or underweight on equities as a part of dynamic asset allocation. It is always advisable to consult an expert before investing.

Q) What’s your outlook for the mid-and small-cap segment and how should investors view the space in FY23?

A) There are more than 1000 stocks that corrected by more than 40% from the peak. There are also pockets of quality stocks that have been flat in the rising market for 3-5 years.

The mean reversing in earnings coupled with improving earnings outlook should help small and midcaps generate decent returns from hereon.

Q) To what extent can the rising crude oil prices and inflation dent India Inc’s fortunes in FY23?

A) Russia is the second-largest oil exporter in the world after Saudi Arabia. The current uncertainty due to Russia- Ukraine war may lead to a hike in oil prices to an extent however this this may not sustain for the long term.

Q) Your estimates for FY23 corporate earnings growth?

A) We are in the early stage of the earnings recovery cycle, corporate profits as a percentage of GDP bottomed out at 1.6% in FY20 after making a high of 7.2% in FY 2008.

We are mean reversing in terms of corporate profitability. Favorable and conducive cost of the capital environment with capacity utilization improving & lower interest cost for corporates are all aiding selective sectors and companies to outperform in coming months.

Q) Which are the sectors you would like to add in your portfolio?

A) Here is a list of top sectors that investors could consider for investment:

Auto:

In this quarter there is a margin compression however we expect more contribution of earnings from a range of sectors such as auto as semiconductor chip shortage started to subside in Q3, leading to expectations of improving capacity utilization for PV makers.

Financials:

Financials as loan growth picks up on account of improvement in working capital demand, private banks continue to gain market share.

IT & ITES:

IT & ITES sector companies to fare well at the back of positive digitization/cloud migration.

Pharma:

Pharma sector should contribute meaningfully to earnings based on two elements a) domestic formulation of companies whose business model is driven by pricing power and hence they can take a price hike in line with WPI to materialise in Q1, and b) API (active pharma ingredient) companies would be in a position to pass on the cost inflation due to nature of the contracts which usually happens with 1 – 2 quarters of lag.

Q) What is your view on the trajectory of interest rates in India as well as globally?

A) The interest rate is going to be an outcome of the G3 (US central reserves, Bank of Japan & ECB) central banks and balance sheet expansion.

Going forward the trajectory of interest rates would be determined by demand & supply-side factors contributing to inflation.

We believe a lot of inflation was driven by supply-side constraints which would continue to be elevated in a world wherein geopolitical factors are contributing majorly.

Demand-driven inflation is more sticker and supply-side factors are more transitory hence one would also have to look at the components of inflation that are driving country-specific inflation.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)

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