The narrative in the market has actually changed from like buy the dips, now people are really questioning that whether to go ahead and buy or not. Help us with your reading on the markets. Given the correction, will you call out a bottom yet or maybe we are near to those bottom levels or is it still time to be a little cautious?
Aashish Somaiyaa: It is very difficult to call the bottom at any point in time. And if you really ask me, our problems did not start necessarily with the things closer to our shores. Our problems actually started right in early October. First, briefly there was a news of money being reallocated to say, for example, Chinese markets, but then all along it has been more like a Trump trade, appreciation in US markets and appreciation in the US dollar. Obviously, that has created headwinds, not only for us, but for most emerging markets, relative depreciation in currencies, outflows and underperformance.
And then of course, from December, January onwards we also started hearing a lot about our own economic performance and results and stuff.
Now, from there on, if you really ask me, a lot of the trends have changed. I mean, RBI policy has changed, first of all. Liquidity, interest rates, all of those things have changed. If you see, for example, even the dollar index, US yields. So, my sense is that if you look for delta change or if you look for trend change, on the margins, things are improving and in the background our markets have corrected a lot, so they are not as expensive as they used to be.
I have given you a long answer, but the trigger needs to come from outside and somewhere in the next month or two we will probably bottom.
Speaking of whether to buy or not to what to buy. Now, if you look at Nifty, its 12-month PE is trading below 20x, which is much below its five-year average. Whereas if you look at the midcap and the smallcap space, despite the correction that we have seen, it is still trading at a premium. So, are you seeing value in the largecap names? If yes, then what are the sectors that you see value in and is it really the time to now look at quality over momentum?
Aashish Somaiyaa: So, good points you made. This has been a trend over the last six-seven months, more specifically June 2024 onwards post the election, one has really seen quality has been outperforming value.
So, if you just look at any data, which is say one-year, three-year, five-year performance and you look at all the sectoral indices, what you will find is that on a three-year, five-year basis, all the cyclical, macro, policy driven sectors whether it is railway, defence, infrastructure, utilities, energy, all of those things on a three-year, five-year basis they have been top gainers. If you look at it from 52-week highs, these are the ones which have fallen the most.
On the other hand, what has been underperforming on a three-year, five-year basis, financials, capital market companies, IT, selectively consumer, healthcare, a lot of these were underperforming.
And now if you see the last three to six months, these are the ones which are actually outperforming. So, last three to six months, we have consistently been calling out a rotation and quality versus value is one rotation.
And apart from that, even there is sectoral rotation. And the third one clearly is a market cap rotation because last six to nine months, we all have been saying not been giving any drastic pulse, but always been saying that rebalance your portfolios, more in favour of largecaps.
You need to keep in mind in the last three years what has happened is that in everybody’s portfolio smallcap has outperformed and cyclical value biased sectors have outperformed.
Plus, people have a tendency that they keep investing more and more where there is outperformance. And then, you need to really rebalance the portfolio when there is a trend change.
So, last three to six months this is what we have been communicating and people still need to review their portfolios. If they are still sitting where the market was two years back, then they need to bring the portfolios back into the centre of the market and bring it to the relative outperformers of today’s time.
You have been quite vocal about the smallcap space and why that space is something that really needs some caution and believe that you do not have your exposure there, but on the midcap space given the correction, like almost a double-digit correction from those high levels, specifically on the index level and the pain in the portfolio is even larger than that. Give us your sense on the midcap space that where do you see this particular area of the market headed and any pockets of opportunity that you believe something that investors should look at?
Aashish Somaiyaa: First on the smallcap space, that is the happy hunting ground. See, we are basically bottom-up stock pickers. The fact that we do not manage a dedicated smallcap fund, but we do have smallcap exposure in all the mixed market cap kind of products. The reason is because if you see smallcap as a space, it is very heterogeneous.
The sectors which have a prevalence in this smallcap space, all of those sectors are very heterogeneous.
And if you see the sectors which have prevalence in the largecap space, say, for example, the oil marketing companies, the big IT companies, big banks, commodities, energy, they are tandem sectors, they move in tandem. If one thing moves, everything moves.
If they do not move, nothing moves. So, it is very difficult to do stock picking. It is very difficult to do stock picking alpha in the largecap space, whereas smallcap, you take stuff like consumer discretionary, pharmaceuticals, chemicals, financial services, very heterogeneous space and depending on what you buy, you can create alpha.
So smallcap is like a happy hunting ground for alpha generation. But we do not manage a dedicated smallcap fund because we know that it is a narrow part of the market and extremely volatile. Once in every five years, you see a 30-40% drawdown.
The money comes after the performance comes and money is ready to go when the market falls 20-30%. So, smallcap really brings about the worst of investor behaviour if you really ask me, that is why no dedicated funds, but at the same time for generating alpha smallcap is a great space to be in and we still deploy like a 30-member team to cover a very wide base and to stock picking in small cap.
I really believe that some of these wealth management companies, asset management companies, for instance just taking one example, they are not as cyclical as it is made up to be. Their earnings is not as cyclical as the stock market volatility, so that is just one example. I think there is value emerging and that whole space is very important for generating alpha.
