We feel that sectors like IT, Banking, Healthcare, Chemicals have strong structural tailwinds and should post mid to high double-digit earnings growth in the future, says Malhotra.
DAILY VOICE | DIY approach to investing is risky, will fade away when the market falls: Arun Malhotra of CapGrow Capital
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We feel that sectors like IT, Banking, Healthcare, Chemicals have strong structural tailwinds and should post mid to high double-digit earnings growth in the future, says Malhotra.
KSHITIJ ANAND
APRIL 29, 2021
Arun Malhotra, founding partner & portfolio manager of CapGrow Capital Advisors, said that Robin hood investing is a gift of the COVID crisis. The thrill of online trading and investing (read speculating) on your own is full of risks.
Not a supporter of the trend, Malhotra feels the best way for retail investors is to invest through SEBI-registered schemes like portfolio management schemes (PMS), Alternative Investment Fund (AIF) and mutual funds (MFs).
Malhotra has nearly 30 years of experience in the Indian capital markets. In 1997, he helped set up DBS Capital Trust's, part of DBS Bank, Singapore, Indian equity broking operations.
In an interview with Money control's Kshitij Anand, Malhotra said sectors like IT, banking, healthcare and chemicals have strong structural tailwinds and should post mid to high double-digit earnings growth in the future.
Arun Malhotra
FOUNDING PARTNER & PORTFOLIO MANAGER|CAPGROW CAPITAL ADVISORS
Edited excerpts:
Q) Partial lockdown in various parts of the country, vaccine shortage, as well as increasing number of deaths - all this is likely to impact economic activity as well as corporate earnings. Your thoughts?
A) The situation on the ground is grim and the government has taken emergency measures to address the shortage of key essentials. The number of patients has far exceeded the estimates and the healthcare infrastructure has collapsed currently.
We believe that we will see some stability by mid-May when the numbers start coming down and the supply of vaccines and essentials are restored.
As compared to the last time, there is no forced shutdown of the economic activity, especially in the manufacturing, but sectors like hotels, restaurants, multiplexes and other travel-related will get affected for April and May.
The economic impact will be felt as the aggregate demand will get impacted. The impact on markets will be a function of the extent to which this second wave continues and that will also shape up the economic growth in the future.
The markets have already reacted negatively to the current situation, but on the other hand, excellent results posted by companies across the sector have kept the positive sentiment.
The impact would be much less than last time as this time everybody is prepared for the disruption.
Q) The government has opened vaccines for all above 18 years. Do you think this could turnaround the sentiment on D-Street?
A) This is definitely a very positive development, as it will help India come out of COVID soon. But, the execution looks challenging in the current scenario.
The long queues and the news of the non-availability of vaccines are already causing some panic among the citizens.
We believe the stock-specific actions will continue and going forward the stock selection will be key to performance. The tide has already risen, and the stocks are not cheap.
The key will be to find companies that are able to navigate successfully through these challenging times and show sustainable growth and profitability.
Q) Small & midcaps outperformed in the recent fall, but if the economy takes a hit, the excess in the broader market space might also go out. What is your view on the small & midcaps space?
A) The small & midcaps space is always difficult to extract returns. One has to be very diligent in the selection, and we believe the promoter and the balance sheet strength would be key factors to look at.
This space works in cycles, and we can sense some euphoria in a few pockets of small and mid-cap stocks. These stocks may go up another 30-40%, but if the exit does not happen, then the whole gains may be wiped out and the retail investors would be the ones that will bear the brunt of this fall.
Q) Pharma space is buzzing and most stocks have already outperformed even though the benchmark indices are trading flat to lower. How should one pick stocks in the pharma space?
A) Pharma sector off late has done well. Pharma is an all-weather sector, which with rising incomes and consciousness for better health, the consumption of medicines will go up only.
Here you have a choice to invest between either a domestic company or one with a U.S generics business or the CRAMS space. Most of the companies have adopted a combination of these three.
The companies that have domestic exposures will do well, while the companies that have strong filings in the U.S in injectable space or successful Para IV filings will do well.
CRAMS is a steady business, with a step-up earnings profile as the Companies extend their relationship and secure more and more molecules for manufacturing.
Pharma will perform in line with markets as a lot of the good stories are already discovered there. The space of Bio-Similar looks interesting but is little far away, while few companies with domestic focus look interesting.
Q) Is the smart money moving towards Corona proof sectors? MFs increased allocation towards IT, Healthcare, Chemicals, and cement on a MoM basis in March while banks, Oil & Gas, utilities, and capital goods saw a decrease in allocation.
A) Sector rotation has become a key element of performance, and it makes sense to take advantage in the short run. However, we feel that sectors like IT, banking, healthcare and chemicals have strong structural tailwinds and should post mid to high double-digit earnings growth in the future.
Capital goods and Infra space have always depended on capital availability and execution, and even though the government is leading the CAPEX cycle, but we have doubts about the pace and execution.
We have seen a strong surge in Real estate sales that should have a multiplier effect on other sectors like cement, steel, and banking. Banking may get affected with the 2nd wave, but overall we are positive with valuations coming off recently.
Q) FIIs turned net sellers so far in April after 6 months. Do you think with rupee weakening, rise in covid cases, lockdown–the pressure on D-Street may well continue?
A) The second wave and the rise in covid cases is definitely a concern. However, we should not forget that the markets have run up considerably since last March, and a lot of FIIs have made big money.
There is bound to be some profit booking triggered by the recent talks of a hike in taxes (capital gains) in the U.S. The uncertainty about how it will get implemented and whom it will impact raises the concerns of the investors and hence some profit booking.
Q) How did your PMS perform in FY21. What was your strategy to beat the COVID stress?
A) We at CapGrow have two Investment approaches- Growth and Special Situation. The Growth Portfolio has performed more or less in line with the benchmark indices, while the Special Situation has done remarkably well.
The Growth portfolio comprises quality businesses with strong balance sheets and management quality. SS portfolio comprises stocks that have corporate events announced by the companies and have a trigger in the near future, and we combine this with our fundamental research.
This portfolio has significantly outperformed the benchmark across all timelines and we are very confident that we will create a big alpha in the coming times.
We had been advising clients to increase equity exposure in the drawdown as we were confident of the positive impact of the surge in liquidity ushered by the central banks.
The distortion and dislocations created in March April last year are opportunities that come in a life term. We were confident of the buying opportunity, however; we were also surprised by the sharp upswing that came sooner than later.
Q) Robinhood investing picked up in 2020 – do you think this is just a short-term phenomenon and the DIY approach will not last long as new investors may well fail to generate alpha as markets turn choppy?
A) Robinhood investing is a gift of the Covid crisis. The thrill of online trading and investing (read speculating) on your own is full of risks.
I am not a big supporter of such one-off trends and feel the best way for a retail investors is to invest through SEBI registered schemes like PMS, AIF, MFs. There the focus is on long-term wealth creation and there is a track record of performance across economic cycles.
These small-time gains in a rising market fade away when the markets fall. We have seen this number of times in the past, and most times the losses not only take away the gains made but also a significant part of the invested capital.
The best example is the case of a hedge fund Archegos where his entire capital of $20 bln built over the last 20 years got washed away because of a few highly concentrated riskier and leveraged positions.
Q) View on metals, commodity-linked stocks in 2021?
A) Not a big fan at this moment. These are not structural plays currently as we see aggregate demand getting affected across the globe. The high prices of commodities like Steel and Aluminium are not sustainable and the stock prices are very sensitive to the prices going forward.
Cement is still a local story and the surge in real estate and the government capex, coupled with the pricing discipline shown so far by the players, will keep the earnings healthy.
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