George Heber Joseph, CEO-CIO, ITI Mutual Fund, shared that he has developed his own ‘SQL’ Investment philosophy using his team’s experience in fund management and using the learnings of some of the most successful investment houses/investment managers.

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In an interview with Zeebiz's Kshitij Anand, Joseph suggested that within equities, investors can have 40% to large-cap and 30% each in the mid-and small-cap segments. This he believed to provide decent returns over the next five years. Edited excerpts:

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Q) What is your outlook on the current market scenario? We have already surpassed 18600 levels on the Nifty50 ahead of Diwali.

A) We continue to remain bullish on the Indian equity markets over the next three to five years. The key reason for our bullishness is the prospects of improved earnings growth. 

The ratio of corporate profits to GDP was 3 per cent in FY20, a level last seen in 2003. The period of good earnings growth has just started for India after a long period of lackluster growth.

Thus, headline valuations are on the higher side of historical ranges that do not change our medium-term outlook. The bull run of 2003-2007 also had several corrections, where the markets fell in excess of 10%.

I remember during May-June 2006, the Nifty and Sensex had a correction of over 20% in just two months. Thus, corrections may come but that does not alter the medium-term picture.

Q) Where are the emerging market opportunities to make money in this market, which is running like a bullet train with no stops in between?

A) India’s economy is coming out of a period of low growth. Its financial sector is coming out of a major NPA cycle and corporate balance sheets, in general, are deleveraged. 

Macro-economic indicators such as the balance of payments, trade deficits, and liquidity are stable and favour growth. Thus, sectors geared to domestic economic revival provide the best emerging opportunities. 

In the last 18 months of the rally, the global sectors have done better than the domestic-focused sectors and we feel this will change going ahead.

Q) Which sectors and themes you are over and underweight on for portfolio strategy?

A) As stated in the previous question, we feel sectors geared to domestic economic revival should do well in the coming years.

Thus, we are bullish on early and mid-cyclical such as financials, auto, and auto ancillaries, consumer discretionary, construction and capital goods/industrials.

Within the defensive sectors, we are bullish on pharmaceuticals as compared to consumer staples.

We are underweight on the metals, IT, and speciality chemicals sectors as we feel valuations discount most of the positives and leave little room for error.

Q) The valuation is not comfortable at current levels even the M-cap-to-GDP is over 100%. Do you think an earnings recovery theme will help the market keep up with premium valuations?

A) A key reason for relatively high valuations when compared to the historical range of the last 10 years is the cost of capital. We have not had such low real returns (nominal yield less inflation) for quite some time.

In the last decade, while nominal rates were low, real rates were not this low as inflation was also low globally. We are now seeing a return of inflation and hence low real rates, which has resulted in high valuation multiples. We feel the real rates will remain low for quite some time supporting valuations.

Q) Why are FIIs selling India (October) even though we are hitting record highs on the benchmark indices and broader market indices?

A) I would not be able to comment on the reasons for the recent selling by FIIs. It can be due to some strengthening of the US dollar seen in the recent months, lower allocations to emerging market equities or profit booking in the Indian markets to invest in other EMs that have not done as well in the last year. 

What we feel is that India continues to remain an attractive destination for investments both from public equity markets and private equity space.

Q) What is the type of asset allocation you recommend to investors, especially seeing a 30% kind of rally in the Sensex, and the Nifty50 so far in 2021?

A) Asset allocation needs to be case-specific, depending on the investor’s age, income profile, etc. But, more generally speaking, I think one should have 70% allocation to equities and 30% to debt at this juncture.

Within equities, one can have 40% to large-cap and 30% each in the mid-and small-cap segments. This should provide decent returns over the next five years.

Q) What is your investment philosophy?

A) We have developed our own ‘SQL’ Investment philosophy using our team’s experience in fund management and using the learnings of some of the most successful investment houses/investment managers.

S stands for margin of Safety – This means the fair value of business minus the current share price. The fund house will look to buy stocks with a good safety margin so that there is more room to generate long-term wealth for our investors.

Q stands for Quality of the business – This is crucial as quality businesses are long-term wealth creators. These are strong and sustainable businesses with a track record of good ROEs and ROCEs. Quality companies generally give positive surprises in earnings.

L stands for Low leverage – Low leverage companies are generally cash-rich. Therefore, they can invest and grow their business. In addition, high leverage companies are at greater risk in case of business downturns.

Q) What is your view on the solar and energy themes?

A) The solar and renewable energy themes are promising themes for the future.  However, one needs to understand that they are still evolving themes.

Many new technologies such as hydrogen as an energy source, battery, and storage of energy are being developed. Thus, over the next decade, these can become mainstream, resulting in an overall reduction in pollution levels.

(Disclaimer: The views/suggestions/advice 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.)