Market Outlook:
Beaten down mid- and small-cap stocks are in the limelight again, as sentiments have turned positive and valuations have started moderating. The broader markets have outperformed large caps and there has been a reasonable degree of valuation catch-up. Since 1st February 2019, the Nifty Small Cap 100 and Nifty Midcap 100 have outperformed large caps, having risen 9.6% and 8.6% respectively while Nifty 50 was up 8.1% (returns till 2nd April-19). We expect this optimism to continue going into the election months as the markets take on a more risk-on approach owing to the following factors:
· General Elections – A stable and decisive government at the center will make it easier to drive and continue fiscal and policy reforms. Reforms like Direct Tax Code and simplification of GST will help businesses and consumers both.
· Easing Liquidity – With central banks globally including the RBI moving towards a dovish monetary policy stance, we can expect global liquidity to improve, driving asset prices.
· Improving Portfolio flows - FIIs have invested a net $2.43 billion in stocks in March 2019 and with better economic outlook for India vis-à-vis other EMs, we can expect the portfolio flows to continue.
· US-China Trade Talks – US and China seem close to signing a new trade agreement while US also delayed tariff increases on Chinese goods scheduled for March 1st 2019. A resolution is expected soon and will be positive for the global trade & economy. Any positive outcomes on this front will be good news for the emerging markets including India.
· Moderating Inflation – Inflation in India has moderated to the lower end of RBI’s target range of 2%-6% (2.57% in Feb’19) and is expected to be in this range. Moderate / lower inflation is generally equity positive.
· Stable Crude price – Crude oil prices remaining stable will help India manage both its fiscal and current account deficits and also keep the input costs in check for most manufacturing companies
· Resolution of IBC/NCLT cases – Banks have started to report improving asset quality and big resolutions like Essar Steel, Bhushan Power & Steel etc will boost the entire banking sector while recapitalization of weaker banks which help credit growth.
Product Update and portfolio position:
· ABSL Pure Value Fund continues to follow a value based investment philosophy that is followed by the world’s most successful investment gurus like Warren Buffet, Benjamin Grahim and Charlie Munger. It looks to invest in stocks that have adequate safety of margin (buying stocks at lower prices than their value with healthy margin) and strong fundamentals such as earnings growth, dividends, cash flow, book value, etc.
· It predominantly follows a bottom up stock picking approach while sector call is taken based on value unlocking opportunity possible in the next 6 months to 2 years. Basis this investment style, we have avoided exposure to sectors such as IT, Pharma and Banking (PSU) in the last couple of years and that strategy has worked very well in the past.
· CY 2018 has had a volatile journey for equity markets, where the fund has also underperformed the broader benchmark index. We were O/W on Oil & gas, metals, textiles, chemicals and U/W on IT and Pharma. Rising crude oil prices and depreciation of INR improved performance for export oriented sectors - IT and Pharma. We do not follow benchmark hugging strategy, thus our stocks will fall more during market correction. Overall, these had an impact on the fund’s performance.
· In the last 4 years, AUM of the fund has increased from Rs 1000 Cr to Rs 4000 Cr while it continues to be an ideal choice for investors looking for higher returns with higher risk and will continue to have a higher number of stocks of which large number will be small and midcap stocks.
· Portfolio changes - We have increased our exposure in the banking sector which is now at ~12% owing to value unlocking opportunity occurring to us. Going forward, the fund will continue to remain value focused and after the correction in the market, we continue to hold stocks which we think are likely to give 12-15% earnings growth. Outlook for Nifty earnings is 15% over next 2-3 years. We expect the fund to continue to outperform with a sizeable margin though there could be bouts of volatility & marginal underperformance
· Market outlook: Due to the recent market correction, lot of value stocks have come off very sharply. Some stocks which have good quality with earnings visibility have become more expensive. For eg: HUL typically trades at 40-45 is now trading at 55 times. Correction has helped us to look for structural themes in the small and midcap space
· GDP, IIP, high frequency data points have started to improve indicating a turnaround in the micro-economy. Rural economy is starting to pick up with government focus on rural India and improving farm income, recent MSP hikes, should lead to strong rural consumption growth. We have also seen growth in auto, consumer staples - 9-10% volume growth in last 1-2 quarters and expect double digit growth in FY19. as capacity utilization increases private sector capex should take place subsequently.
· We continue to remain bullish on markets in medium to long-term perspective despite short term concerns due to election season would limit upside. We expect earnings momentum should continue into this fiscal year and market should take off from here on. In the small & midcap space, we believe valuations are at reasonable levels and there would be enough ideas to scale up faster. We are fairly confident that earnings growth for them will be strong and returns should be higher than large cap in next 2-3 years leading to subsequent market gains. From a risk point of view – global currency, economic growth and rising oil price could put pressure on INR.
· Market cap break-up: Portfolio is currently 55-60% into midcaps, 25-30% large caps & hold 10-15% small caps. Will tend to opportunistically increase exposure to midcap/small-caps going forward. Recently added I.G. Petrochemicals Ltd. (IGPL), a small cap stock (1400 market cap), expected to double in 2-3 years period.
In this backdrop, ABSL Pure Value Fund, which has a Mid/Small Cap bias (over 65%) in the portfolio is expected to do well. Our returns have picked up strongly in the past 1 – 1.5 months (12.9% since 18-Feb-2019) as our value bets in the small-midcap space have begun to deliver.
Parameter
|
1 Mth
|
2 Mths
|
3 Mths
|
6 Mths
|
1 Yr
|
3 Yrs
|
5 Yrs
|
Since Inception
|
ABSL Pure Value Fund
|
0.23
|
9.52
|
0.64
|
3.5
|
-18.32
|
10.86
|
16.71
|
15.99
|
S&P BSE Enhanced Value
|
4.36
|
17.29
|
6.29
|
10.33
|
-13.96
|
8.32
|
3.43
|
2.29
|
Nifty 50
|
3.84
|
6.5
|
7.43
|
13.31
|
11.32
|
14.77
|
11.34
|
13.82
|
· The philosophy of the fund continues to remain value focused, and hold stocks which we think are likely to give over 12-15% earnings growth. The portfolio is largely skewed towards Consumption & Exports oriented themes with high conviction in commodities like metals, chemicals, oils. In terms of market cap positioning, it will continue its aggressive stance.
· Bottom-line for investors: You have made money in ABSL Pure Value Fund. Unless your risk appetite has changed or you need money, stay invested from long term perspective.
Source : Aditya Birla Capital product Note.
No comments:
Post a Comment