The domestic market is expected to see strong bouts of volatility in the near term as we approach election season. Aman Soni, Head of Operations at Prudent Equity, believes one should remain invested in stocks but the quantum is something one needs to identify based on their time frame and risk appetite. In an interview with Mint, Soni also shared his views on the market and his strategy for the mid and small-cap space. Edited excerpts:
What is your view on the current market condition? Is it time to hold some cash and avoid high exposure to equities?
Never shy away from investing in equities. Since equities have been the greatest performing asset class since their existence, we continue to be optimistic about them.
Even though we are at an all-time high, one shouldn’t give up on investing. Profit-booking is a practice that is both prominent and ongoing.
However, to reinvest that money back into the market, one must also continuously look for fresher opportunities.
We have seen enormous PE (price-to-earnings) expansion in most industries last year, and going forward, the only thing that will drive markets will be earnings.
We are likely to experience some volatility as we approach election season; while keeping some cash on hand can be useful, one should remain invested in stocks, the quantum is something one needs to identify based on their time frame and risk appetite.
Also Read: We have shifted focus from debt to equity schemes, says Ravi Jha of LIC Mutual Fund
What are the major risks for the market for the next one year?
Valuations are the only thing concerning at today’s levels, markets are pricing all the good news and there is no room for error, even a slight miss would lead to correction.
As they say, bull markets climb a wall of worry and bear markets slide down a river of hope.
In every bull market, there are pockets of extreme exuberance and an area which is still in its infancy.
The ongoing read sea concerns are one aspect which the market currently seems to be not in a mood to discount.
One needs to be always watchful of commodities such as crude; any adverse decision-making in the OPEC region could be a temporary dampener for the markets.
Along with that, we are entering an election year which will bring with itself volatility in the months to come.
How are you playing the mid and smallcap spaces? Can we make fresh bets on them?
We have always been small, mid-cap investors and continue to find opportunities in this space for our investors.
We’ve recently identified a company which is a Mumbai-based real estate developer for our investors.
It has been more than six months since most people formed opinions of small-caps being overvalued and the probability of making returns more in large caps.
However, we are still sitting on yet another all-time high in small caps.
It is imperative that we recognise that the small-cap segment is for stock pickers.
Between ₹1,000-5,000 crore in market capitalisation, there are more than 600 stocks, of which we must assemble a portfolio of around 15 to 25 stocks.
Therefore, while investing in small-cap firms, one should learn to find the needle in the haystack rather than concentrating on the valuations of the larger index, which may not be an appropriate strategy.
This method should continue to provide investors with lucrative returns.
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Which sectors are you bullish about for the next one to two years? Is it time to stick to defensives amid volatility?
We are firm believers that there is nothing defensive in equities and money should not be deployed simply for the sake of deployment.
If there is an opportunity available at a reasonable price, one should invest and avoid it if the opposite is present.
We have been constructive on infrastructure for quite some time; this has worked extremely well for us, and we intend to maintain a similar stance in the foreseeable future.
In the last two to three months, we have recommended investors book profits from a few of our companies in sectors namely, pharma, ethanol and infrastructure.
These stocks delivered returns ranging from 60-100 per cent in less than six months. Hence, we found taking money off the table a prudent strategy.
Purely from a value standpoint, several banks appear reasonable, but they are facing their fair share of issues, which are expected to last for some time.
We presently have little to no exposure there, but we are keeping an eye on the changes on the ground.
Why are FIIs selling Indian equities while the domestic economic outlook is strong?
The FII selling essentially is happening majorly in banks only.
If we look at the current year’s data only, the bulk of the selling is in banks and that too particularly in one company.
The banking sector is currently undergoing its near-term challenges due to which we are seeing such a reaction.
This is not a cause of concern for the overall economy and where we are headed.
Banks will need their time to rejig things and take a call on whether they need growth at the cost of margin compression or vice versa.
Until that clarity emerges, the sector is likely to witness pressure, on the contrary since it is just a temporary roadblock, value buying may emerge at lower levels.
When do you expect rate cuts from the US Fed? Do you expect a substantial rate cut?
As a bottom-up stock picker, we believe that anticipating Fed rate reduction is a futile exercise.
Instead, we are more concerned with the profits that our portfolio company or its rivals are expected to announce in the coming quarter.
External events, such as Fed rates, have little to no impact on our investment approach and stock selection strategy.
The recommendation to people investing would also be the same – they should not base their investing decisions on the Fed’s stance, but rather on earnings momentum.
Ultimately, markets are driven solely by profitability.
As the saying goes, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
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Disclaimer: The views and recommendations above are those of the expert, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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