Pankaj Gupta, fund manager, SBI Contra Fund gives his perspective on the investment situation in the markets. He dwells on his funds equity selection process, themes the fund is bullish on and various investment avenues available in the markets. He spoke with Rajesh Naidu of The Financial Express. Excerpts.
Could you give us details about your equity selection process, considering the current markets?
Investors need to understand that contra funds are diversified funds, which have no sectoral bias and are multi-cap in nature. The equity selection process at our end takes into account three basic strategies. First, it is always a mid-cap versus a large-cap. At this point in time we are increasing our exposure to mid-caps in a select way. And in this strategy the key thing is selecting companies, which have strong fundamentals and necessary resources in terms of management and capital to ward off near-term concerns and deliver superior results in the medium term.
Secondly, it also includes sectoral bets. And thirdly it involves a theme-based approach.
Investors must note that extreme pessimism has been built in certain stocks across the sector and hence they are available at very attractive valuations. More so, themes like railways, chemicals and fertilisers also form reasons for good investment arguments.
With the markets seeing a downward movement, what are the portfolio changes have you made to limit the downside in your portfolio returns?
Over the last six months, our exposure to IT, consumer, and oil and gas sectors has increased. We have trimmed down our weight in metals and in some engineering stocks. One of the few factors that has helped us is the high cash levels. At this point in time investors must note that value has again started emerging in some of the engineering stocks.
Would you recommend a contrarian strategy now?
Investors must distinguish between fundamentals of a situation and the expectations reflected in the stock price. Investors must not only focus on the general sentiments affecting a business and hence its stock price but also on how such sentiments can lead to a disconnect between the business fundamentals and stock expectations. We believe that at times the market takes the generous route in terms of rewards, while also at the same time, sectors (stocks) have to bear the brunt of its nosedive.
Hence, investors must understand that following the market’s movement may lead to a right asset class mix and also right sectors/stocks.
Which are the sectors you would recommend exposure to and which one are you avoiding?
Right now we see a lot of value emerging in Indian markets. We believe in the fact that a bottom-up approach across sectors would be a big plus for investors. At this point in time we are bullish on financials, old economy sectors like oil & gas and cement. We are avoiding the utilities sector as of now.
What would you advice investors who are entering into the markets?
It is a bit difficult to sense the bottom in the markets. Our assessment is markets always move in advance and anticipate both the good and bad news much before it actually happens. I would say remain positive on the Indian economy, it will sustain its growth for the greater good. Hence, remain invested. For retail investors we would say that they should take the SIP route to protect their principal from complete erosion. It would be better if you spread your investments over the 3-6 months period (time-bound) so that you would be able to cash in at the crests in the markets.
Could you share your perception on the spurt in oil prices? What are your reasons for the spurt?
There are many factors, which are leading to the spurt in oil prices. You must note that there are two factors involved in an oil price. First, a base value and a speculative premium. The base value has increased over time because of higher cost of production per barrel. However, the recent spurt in oil prices has more to do with the excessive speculation over geo-political issues. My sense is that the speculative premium wouldn’t sustain for long and it would correct. Not to mention the fact that there is a demand destruction happening, which may lead to significant price correction. We believe that crude would definitely cool off. Some signs of it have already started emerging. The question is when would it. We are on the side that believes it would correct soon for the better.
What is your in-house analysis of the participation of retail, HNIs, domestic institutions, and FIIs in the markets?
An important development that worked well for all categories of investors is the significant dip across the market. It must be noted that large-cap, mid-cap and small-cap have all corrected by 35%, 45% and 55% respectively. This is a lucrative opportunity to buy into those companies, which are fundamentally strong and have a less debt component and are cash-rich. Investors across categories have demonstrated maturity.
There is cherry-picking happening and this works well for all of us. One shouldn’t be too concerned about FIIs money inflow and outflow. It must be borne in mind that FIIs act in an extreme way and hence chasing their abrupt shift in focus would disturb the discipline of one’s portfolio composition.
