Vineet Bagri, Managing Partner- TrustPlutus Wealth believes that small and midcap companies are now substantially more expensive than in the past. This performance may not repeat itself in FY23.

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In an interview with Zeebiz's Kshitij Anand, Bagri said that we have positioned our portfolio with larger weights in large-cap companies and reduced weights on companies with expensive valuations. Edited Excerpts –

Q) Geopolitical events as well as expectations of strong tightening by the US Fed, has certainly fuelled a risk-off sentiment. What is your take and how should long-term investors view this?

A) The key to long-term investing is to identify great companies and buy them at reasonable valuations. In most cases, a long-term investor should not worry about their holdings, provided the earlier statement holds.

Within this ambit, we recommend investors be mindful of asset allocation and the relevance of underlying businesses. Asset allocation is a great mechanism that helps in protecting and enhancing investor wealth if employed diligently.

It is also important, especially for the long-term investors, to review their investment thesis from time to time, as trends change.

For example, shaving products is a great business, but what can the company do when their target population decides to embrace a different preference!

Q) What is your take on the December quarter earnings and what is the kind of projections you foresee for FY23?

A) Overall, Nifty50 earnings have grown at 5 per cent QoQ and 36 per cent YoY in the results that have been declared so far. Results for NSE500 are also similar.

This is a great performance under any circumstances, more so under difficult conditions. We have to remember that earnings for Q3FY20 (previous period) were elevated on account of pent-up demand, so this strong YoY growth in Q3/FY22 is remarkable.

Consensus earnings growth estimates are 11 per cent for the next 12 months and 16 per cent for FY24. These projections are well balanced, with risks on both sides.

Larger public and private spending on Capex could boost growth, while on the other hand if inflation persists or increases, earnings could also reduce.  At the current levels, risks seem evenly balanced.

Q) Last two months have been volatile how have you positioned your portfolio to tackle volatility amid external headwinds?

A) We have positioned our portfolio with larger weights in large-cap companies and reduced weights on companies with expensive valuations. We have also avoided cyclical businesses in metals and small-cap stocks.

Q) Inflation might certainly become a pain point for the economy as well as RBI – what trajectory you foresee for rate in next 12 months. How should investors position themselves to tackle the change?

A) We broadly categorise inflation into two buckets, viz. borne out of oil prices and otherwise. Unless new supply comes into the market, oil prices will not reduce, in fact they may increase.

That’s why the USA-Iran nuclear deal is important. Non-oil inflation is sticky because of the sharp increase in labour cost, which is driving up everything else. We think that inflation should moderate in the second half of this calendar year as base effect comes into play.

Q) Small & midcaps have clearly outperformed in the past 2 years with handsome margin – how should investors view the space in FY23?

A) Small and midcap companies are now substantially more expensive than the past. This performance may not repeat itself in FY23.

Q) If someone is running a portfolio with deep red – what should be his/her strategy before the financial year-end. Hold positions or exit stocks. If exit then which stocks/fund should the investors' exit from?

A) Good quality companies usually retrace their previous highs and make newer highs. However, the converse is also true for companies that have poor fundamentals, weak promoters, and bad capital allocation.

Therefore, investors should segregate their holdings into these two categories, hold the former and sell the later. Fund managers who have seen cycles usually find their way back.

Q) FIIs clearly remain net sellers but retail investor force is something that is keeping market float at every support. How do you see FII activity in near future? There is a saying that when FIIs exit – it is usually the best time to book profits?

A) Well in the past, FII selling was a clear sign to book profits. But at this juncture, there is so much participation from retail investors that FII selling is unable to move markets.

Additionally, the rupee has not depreciated heavily despite this FII selling.  At some point in the future, FIIs will again become buyers, as and when the uncertainties around the US Fed actions become clear. We expect that FIIs could return to Indian equities in the second half of 2022.

Q) The recent selling was largely seen in high PE stocks which low PE stocks did not see much sell-off. Can we say that smart money is now moving out of high beta counters and richly priced stocks?

A) Some of the selling was definitely due to expensive valuations. However, we have also seen stocks with heavy FII holdings underperforming, including some index heavyweights.

Low PE stocks did not also gain as much as the expensive pack in the first place.

Q) Government has notified the first phase of the green hydrogen policy. What does it mean for markets and which companies are likely to get benefited the most? Also, does that mean that companies with high ESG ratings will be considered for investment by foreign funds?

A) It is very early to comment on green hydrogen policy and companies in this segment as this is still being set up.

Already, several large international institutions only invest in companies with high ESG ratings – which also explains their lack of interest in fossil fuel and tobacco companies.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)