As an emerging market, India like most other EMs are guided by policies of the developed world. Synergy between policies across the developed world and at home are typical long term triggers for investors. The ongoing aversion to China and the seismic shift of global supply chains is having a ripple effect across many EM suitors, key among them — India, Vietnam, Indonesia, Malaysia, Thailand, Philippines and Bangladesh. In India, the broad-based PLI scheme encompassing most major manufacturing sectors and sub sectors have been incentivized to build export centric capabilities. Indian companies have been at the forefront of harnessing these benefits to rapidly scale up global presence.
Earnings over the last two quarters have been robust. Commodity-oriented companies were key outperformers driven by surging commodity prices and balance sheet optimization. Technology companies including internet names reported strong results driven by higher utilization and higher margin contracts. Utility & Energy sector underperformed consensus analyst estimates. Channel checks also indicate a robust Q2 as a prelude to the festival demand. While the global chip shortage and supply constraints have put a dampener on select sectors, demand remains buoyant and near term challenges should not cloud long term capabilities of these industries.
The third and to my mind significant trigger for wealth creation is disruption. Disruptors have always changed the way we look at investing. In the 1920’s, Radio Corp of America (RCI) was the largest company in the US and along with AT&T took over dominance from traditional bellwethers like steel and the oil industry. At the time radio waves was a disruption in communication services and as US hit its golden age of growth investors flocked to the ‘new economy’. In the 1950’s it was the turn of the auto Industry to take on the mantle of the new economy. And in the late 80’s and early 90’s the emergence of computing giants like IBM and Software manufacturers like Microsoft, redefined how we look at investing. Our conviction in these themes is so high that we have launched 2 funds with this theme at its core – a domestic fund and an international Fund of fund targeting global opportunities along with our partner Schroders.
Our emphasis on portfolio construction revolves around the idea that stock selection is the key to wealth creation. We endeavor to identify inherent wealth creation levers that are sustainable over the medium to long term. The fundamental nature of our research looks to identify a pool of companies whose primary attribute is financial robustness. This coupled with the capability of the management to stress the business assets and exploit opportunities provides us with a portfolio of companies with strong financial metrics and a sustainable long term growth trajectory.
Our domestic portfolio companies, today encompass a cross section of growth ideas ideally suited to benefit from gaps left by weaker incumbents and capture opportunities. The core portion of our portfolio consists of companies that emphasize quality which we continue to hold on to.
The rally over the last few months has seen beta and value outperforming. We term this as normalizing given that quality has outperformed consistently for the last several years. However, with the broader markets including ‘Beta’ stalling, quality oriented companies have, once again, taken over the mantle of market leaders. This has also resulted in markets narrowing a tad. We have begun witnessing initial signs of overheating in market prices as strong retail participation and euphoria like trends have begun to take root across several pockets of the markets.
To say the market is at an all-time high is a very misleading statement. The value of the Sensex or the Nifty is an indicator of the performance of our investments and as such should not be a barometer to deploy or redeem investments. Ultimately, when one buys equity either directly or through mutual funds, one participates in the earnings of a company or portfolio.
New investors entering equity markets should not get enamored by the recent run up, rather focus on the long term potential of equity investing. A systematic investment plan is an ideal solution for first time investors. We remain vigilant in identifying markers and have used elevated valuations to rotate our portfolios. Investors can expect volatility in the near term and should use sharp market drops to add to existing allocations.
(The author, Jinesh Gopani, is Head Equity, Axis Mutual Fund. The views are his own. Stock(s) / Issuer(s)/ Sectors mentioned above are for illustration purpose and should not be construed as recommendation.)
