"Corporate India is witnessing a consensus earning upgrade cycle"

Despite reservations about the ‘froth’ building up in the mutual fund industry, Sorbh Gupta, Senior Fund Manager (Equities) Bajaj Finserv Asset Management, believes that the time is right for investors, especially those taking their first plunge, to park their funds in flexi-cap funds to take advantage of the positive trends

As a fund manager, could you please provide insights into your investment strategy for managing funds?
At Bajaj AMC, we have developed an investment strategy encompassing three sources of outperformance which together make the framework known as INQUBE. This word comprises the first two letters of the words information edge, quantitative edge and behavioural edge. Information edge, which relies on traditional research of business and financials, remains significant. However, in today’s increasingly efficient markets, it alone cannot generate alpha. 

Therefore, we are incorporating quantitative tools to bolster the effectiveness of our traditional research process. We strongly believe that behavioural edge will be crucial for achieving outperformance in the future. This edge involves two key aspects: understanding where the crowd may have over or under-reacted to capitalise on such insights and limiting our own behavioural biases as fund managers to make better decisions based on the available facts.

What is your outlook on the earnings prospects of companies for Q4FY24 and how do you assess the investment opportunities in light of this perspective?
It would not be wise to take a homogeneous call on earnings as different sectors and companies are in varying stages of their earnings’ lifecycles. After bottoming out during the coronavirus-triggered pandemic, corporate India is witnessing a consensus-earning upgrade cycle. This is primarily being driven by power, infrastructure, real estate and capital goods sectors, with the banking sector also witnessing upgrades. We anticipate this trend to continue in Q4FY24 as well.

However, IT services and consumer staples might take a couple of quarters to bottom out. We have structured our portfolio to capitalise on this earning uptrend and have included some manufacturers of speciality chemicals in the portfolio as we believe their earnings have bottomed out. Nonetheless, equity investors should anchor their thought process on a long-term earning trajectory rather than a quarter-based earnings outlook. In fact, a long-term investor should aim to identify the market’s over-reaction and under-reaction during the Quarterly Results.

How do you anticipate the upcoming elections will impact the equity market?
The equity markets have already begun factoring in the continuity of the incumbent government following the outcomes of the December state elections. However, any adverse results in the upcoming June elections results could significantly dampen market sentiments. Currently, we view this as a low-probability event. While adverse election outcomes pose a near-term risk, for a long-term investor, stability and policy continuity rather than specific political party outcomes matter more. In the Indian context, there is widespread political consensus on reforms and economic growth, which bodes well for long-term equity returns.

In light of the stress test results recently unveiled by asset management companies, what lies ahead for Mid-Cap and Small-Cap stocks?
The stress test results for various mutual funds’ mid-cap and small-cap portfolios have yielded mixed outcomes. Initially, the markets did react negatively to this but since then have recovered. We believe it is crucial to adopt a diverse perspective on mid-cap and small-cap investments. Yes, there is some froth building in certain pockets of small caps. Especially, businesses not having any great execution track record are moving up based only on macro stories or the possibility of order wins. However, at the other end of the spectrum, good businesses are exhibiting stable growth and available at fair valuations too. Although the ratio of Large-Cap versus mid-cap stocks is elevated, it does not appear to be at an extreme end.   

What are your perspectives on the Securities and Exchange Board of India’s directive to mutual funds to halt accepting inflows in exchange-traded funds (ETFs) that invest overseas?
We believe that this directive is driven by the Reserve Bank of India’s industry-wide limit on overseas investments. The regulators are best placed to decide on upward revisions of overseas investment limits for the mutual fund industry. Overseas allocation does provide investors with a good diversification opportunity.

What guidance would you offer to investors seeking to invest Rs 1 lakh in equity funds?
An investor entering the equity markets should have a long-term orientation, which is a prerequisite. Making a lump sum investment in a well-diversified flexi-cap fund is a good starting strategy for those interested in investing in a single fund. A well-managed flexi-cap fund provides balanced exposure to large-cap, mid-cap and small-cap companies. If the investor is worried about the binary outcome of general elections, a three-month systematic transfer plan (STP) is also a viable option. For risk-averse investors, beginning their investment journey with a well-managed balanced advantage fund (BAF) is advisable. These funds not only consider fundamental factors but also incorporate behavioural factors to reach an optimum allocation across different asset classes.

Disclaimer: The opinions expressed above are personal and may not reflect the views of Dalal Street Investment Journal.