Dalal Street Voice: We are fully deployed & infrastructure, real estate adjacent cyclical are our biggest exposure: Kanika Agarrwal of Upside AI
A big votary of fundamentals when it comes to picking a stock, Agarrwal in an interview to Zeebiz.com Kshitij Anand says one cannot avoid losing money in the market. The idea of staying invested is because we cannot time falls and volatility
Kanika Agarrwal, co-founder of Upside AI, says that the long-term markets trend up, and not down. So, I believe SENSEX will hit 100,000 at some point – I just don’t know when.
The fintech startup, inspired by Benjamin Graham’s book The Intelligent Investor, was founded on the belief that technology makes better decisions than humans since machines are unbiased and unemotional.
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A big votary of fundamentals when it comes to picking a stock, Agarrwal in an interview to Zeebiz.com Kshitij Anand says one cannot avoid losing money in the market. The idea of staying invested is because we cannot time falls and volatility. Edited excerpts:
Q) How will the US Fed outlook along with China crisis impact equity, currency markets?
A) I think the US Fed, and specifically (Jerome) Powell, is doing a great job of gradual communication. Any policy shift is communicated slowly, but clearly - be it changing positions on tapering or interest rates.
The US Fed policy is arguably the single biggest catalyst of fund flow across asset classes. If the Fed suddenly turns hawkish, combined with China’s struggles, there can be fund reversals. Market support for the last 3 months has been without FIIs, who were net sellers since July’ 21.
Q) What are your views on the impact of the fallout of Evergrande on the Indian market and sectors in specific?
A) This ability to make bold sudden decisions is thanks to how their politics are structured and to be sure, it is a double-edged sword. In modern democracies, the slower pace of progress is a feature, not a bug.
In 1958, as part of the Great Leap Forward, Mao ordered sparrows, rats, and other “pests” be killed en masse. What ensued were severe ecological imbalance and the Great Chinese Famine which killed ~30 million people.
What is interesting in China is the strategic push to boldly turn the ship around in many sectors simultaneously. Currently, it is changing regulations for fintech, education, real estate, etc.
We can see some of the short-term issues immediately (like Evergrande or the slowdown of Chinese IPOs). What is difficult for us, or even the Chinese government to understand the long-term impact of these policy changes.
That’s the point of the story about Mao and the famine.
Q) What is the investment strategy of your fund in picking winners?
A) The key part of our strategy is that there is no silver bullet. Each market is different and therefore, the strategy must evolve with the markets.
For us at Upside AI, we are using machine learning algorithms to understand how the market is defining “fundamentally good” today and accordingly build an investment strategy.
This means, for example, that in March 2020 we were buying more specialty chemicals while in December 2020 we were heavily exposed to metals.
There are good companies in both sectors – it’s just the market’s definition of healthy fundamentals changes enough for us to consider different types of investments in different markets.
Q) How are FIIs looking at India? They have turned net buyers after 5 consecutive months of being net sellers at least in the cash segment of the Indian equity markets
A) Few things here: first, FII flows broadly trend up in India year on year. Sure, there will be good and bad years, but this is a secular trend.
In the short term, flows are driven more by global macro than India specific factors – Fed, China, etc are bigger drivers than our earnings data.
Second, while flows increase, we are still pretty small as an allocation for most funds. Even within the MSCI Emerging Markets index, we are only 11% - in the World Index, we don’t even feature.
Lastly, the fabric of our markets is being actively disrupted since 2020 – retail and domestic participation is up. As mentioned in the earlier responses, since July, FIIs have been net sellers and retail domestic has supported markets a lot.
Q) What is your call on markets for the next 6-12 months? Nifty eyes 18000 while the S&P BSE Sensex is on course to hit 60000?
A) We generally don’t take short term calls on the market. Long term markets trend up, not down. So I believe SENSEX will hit 100,000 at some point – I just don’t know when.
We are fully deployed in the markets because we do not believe in timing the market.
Q) The market is rising on the backdrop of expensive valuations when compared to history? How does the number stack up for Nifty as well as for mid, and small cap indices?
A) I actually disagree with the point on valuations. PE in a silo to decide if a market is expensive is easy to do, but unfair. PE is a quick and dirty proxy for discounted cash flow (DCF). DCF discounts back the future value of a business today.
20x PE today is not comparable to 20x PE in 2010 because our interest rate regimes look completely different. Therefore, the rate at which future value of businesses is discounted has changed and old valuations do not apply.
Even so, post current earning season, our indices are trading at very reasonable valuation multiples with significant tailwinds.
Q) Which sectors will take Nifty50 from 18000-20000 in near future?
A) For most of 2021 we have been in different pockets of commodities and cyclical – in the first half of the year, our largest sectoral exposure was metals which we exited in July 2021.
Currently, infrastructure/ real estate adjacent cyclical are our biggest exposure.
Q) The market is giving plenty of opportunities to investors to make money, but how should one avoid losing money in this market?
A) One cannot avoid losing money in the market. The idea of staying invested is because we cannot time falls and volatility. Therefore, more money will be lost trying to time a fall than you will make on the upside.
Be consistent with your SIPs, follow a sensible asset allocation and be realistic about your expectations. Just because we had a bull run last year, does not mean 50-100% annual returns are a reasonable expectation!
Q) What is your investment philosophy? Has your holding in cash increased amid the recent run up in prices?
A) Our investment philosophy at Upside AI is to be unbiased, unemotional and almost ruthless in our decision-making process.
The beauty of using machine learning is that it allows us to be different types of investors – be it a value investor, growth investor, IT expert, etc. depending on the kind of investor that is doing well in current market conditions.
We are not wedded to a certain investment style or sector. This allows us to build differentiated portfolios and have no baggage of past successes/ failures while deciding what we should buy today.
(Disclaimer: The views/suggestions/advices expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)
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