The major thrust of the government during the last two years has been to revive the capital expenditure cycle, thus, translating to more private investments. All we must do is select the most fundamentally sound stocks to invest our money in. Corporates now have a healthy balance sheet. Indian engineering components exports grew by 37 per cent in 2022 when compared to 2019 and grew to $ 111 billion in 2022, a rise of 50 per cent from 2021 levels.
Arvind Kothari, Founder & Director, Niveshaay Investment Advisors explains to MintGenie how the focus should be on companies that exhibit pricing power.
Q. Global cues and aggressive rate hikes have dragged down stock prices. Do you think that this is the right time to enter the market or are you anticipating more downfall in the coming weeks?
Precisely, this is the first question that comes to our mind whenever there is a correction in the market. Volatility is inherent to markets, especially in the segment that we focus on, i.e., small-mid caps. Let us put things in perspective. The tightening of monetary policy by FED and now by RBI, inflationary environment due to the Russia-Ukraine conflict and COVID-19 led supply chain disruptions have made current markets volatile. To answer your question, we don't know whether there would be more downfall or not, but what we at Niveshaay think is that a few factors have become quite favourable for the country to find a pivotal place in the global value chain. The current environment doesn’t augur well for businesses that require a consistent supply of capital to grow.
To answer, your first part of the question, yes, it is a good time to enter markets. In the Indian context, corporates now have a healthy balance sheet, the most popular phrase coined during the pandemic 'China plus one' looks structural providing tailwinds in the manufacturing sector. Indian engineering components exports grew by 37 per cent in 2022 when compared to 2019 and grew to $ 111 billion in 2022, a rise of 50 per cent from 2021 levels.
Acceptance of any product increases when one gets an opportunity to try and experience new products. India just got that and a few companies totally grabbed these favourable opportunities to provide to international as well as domestic clients.
The major thrust of the government during the last two years has been to revive the capital expenditure cycle. The rise in government capital expenditure helps to crowd in private investment. The virtuous cycle of investments begins in the economy. With higher energy prices globally and supply chain disruptions, India can reap benefits from the government support through PLI schemes and import substitution policies along with traction in export markets.
Insights from visiting various exhibitions, and interacting with varied Indian entrepreneurs highlight how imports of raw materials have reduced and domestic sourcing has increased wherever possible.
Also, capital goods companies are showing healthy order book at a time when government policy of export duty on steel translating to a reduction in steel prices in the home market would help these steel-consuming companies in a significant way.
Overall, to date, the earning season has been fantastic where few companies have shown good sales growth and maintained or improved margins. Some companies did show margin pressure too. The focus should be on companies that exhibit pricing power. This is also the time when global companies in the developed economies are incurring margin pressure. I believe Indian manufacturing will be the best quality asset to own across the globe as an asset class.
Q. Most people prefer a concentrated portfolio with high-growth stocks. However, this involves too much risk. How many stocks do you advise in a portfolio to manage risks?
Our allocation strategy is more inclined toward taking concentrated bets comprising 15-20 stocks. To talk a little specific, our strategy is to divide the portfolio into three pies- high growth companies, emerging giants and cyclical companies to create alpha. Sometimes, the allocation to a company can increase to10 per cent only when we have a strong conviction and that comes from our research approach that believes in doing the groundwork to identify emerging trends rather than just focusing on financials which talk about the past business performance.
Also, sometimes as a part of our strategy, we adopt a basket approach while taking exposure in a particular sector till the time, we're able to identify who will emerge as a market leader or benefit the most from any particular emerging trends. Recently, we followed this approach while allocating to the textile sector.
Q. More investors are focused on stock prices and market movements without managing their risks. What risk management strategies would you advise them of?
Our approach in the current market mood is to focus on cash flow generating companies, reasonable evaluations and healthy balance sheets.
Firstly, investors should focus on reasonable valuations as a part of their risk management strategies because the current market mood is characterized by a hike in interest rates, if a highly valued company misses the growth estimate, it negatively impacts the valuation of the company.
Secondly, investment decisions shouldn't be made in stocks that look cheap based on the hope that things will turn around in one to two years. Hope is never a strategy and such companies generally are de-rated in markets which is brutal as we’re seeing in the current ones. I believe that current times are such where one should invest where there is visibility and predictability of earnings.
Thirdly, I would advise not to over-allocate to correlating sectors, follow the basket approach wherever required and keep a high margin of safety.
Lastly, invest in what you know and understand, be disciplined and stick to your process while investing. This will make a huge difference in the long term.
Disclaimer: The views and recommendations made above are those of Niveshaay Investment and not of MintGenie.