We've increased cash in portfolio to guard against event risks: J Jaipuria

Though increased restrictions in Europe and the pending outcome of the US presidential election will keep the markets choppy, JYOTIVARDHAN JAIPURIA, founder of Valentis Advisors, tells Puneet Wadhwa the markets will see positive returns in the second half of the financial year and the year after. Edited excerpts:

Will market leadership change from stocks, such as Reliance Industries, pharma, and IT, to cyclicals in the second half of FY21?

Two events could dampen the near-term sentiment. First, the uncertainty surrounding the US presidential election. Second, another wave of coronavirus in Europe, where daily cases now exceed the peak seen in the first phase by a large margin. While being mindful of these near-term risks, the markets will see positive returns in the second half of the FY21, as well as the year after. The world will slowly return to normal as a vaccine is discovered at the end of the year or early next year. This will be the trigger to see a change in sector leadership in the stock market as we move from ‘lockdown plays’ to cyclical ‘unlocking plays’.

 Is the risk-reward still favourable to enter at these levels?

Opportunities like March come in the market once every 8-10 years where one can make an outsized return. On a practical basis, very few people invest a large portion of their wealth in equities at such times. From current levels, we do expect a correction and advise people to use these corrections to buy with a medium-term perspective. There will be a fair level of volatility given the sharp rally over the past seven months. Over the next few years, stock returns will mirror earnings growth and investors can expect double-digit compound returns.

What’s your view on the mid- and small-cap segments?

Mid- and small-caps will outperform large-caps over the next 18 months led by the three U’s - under-performance, under-valuation, and under-ownership. First, mid-caps peaked in 2018 and since then have corrected sharply, under-performing large caps by a significant margin. Over the last three years, the Nifty is up 14 per cent, while the Nifty small-cap index is down 28 per cent. Second, small and mid-caps trade at a valuation discount of 5-15 per cent to large-caps. Third, they are under-owned and recent Sebi rules on multi-cap funds may lead to some buying interest in mid- and small-caps. Last, these companies show stronger growth in periods of economic upturns that we can see over the next few years.

 Your views on corporate earnings?

Sequential profit growth in the September 2020 quarter will be very strong, but that is to be expected. On a year-on-year basis, there will be a single-digit decline in sales, as well as profits for the quarter. Progressively, things will improve every quarter. There will be a fair amount of dispersion in earnings with the information technology (IT), pharma, cement and auto sectors performing well, while the financials and energy sectors will struggle.

The last time we spoke in June, you were sitting on some cash in your portfolio. What’s the status now?

We have further increased cash in our portfolio to guard against two event risks. First is the strong resurgence in coronavirus cases in Europe and the UK. Second is the US presidential election, where the worry is not so much which party comes to power, but whether we have a smooth transition of power. Given the likely high number of mail-in ballots, there is a possibility that the courts finally decide the winner like in 2000. From a sector point of view, we have taken some profits in our winners.

 What's your stance on agri commodities and specialty chemicals? Is the growth story still intact there?

We like the specialty chemicals space and think it is a multi-year growth story as India establishes as an alternative manufacturing hub. The only caveat here for investors is that the re-rating in this sector is behind us. Here on, stock returns will be a function of earnings growth of companies in the sector.

Should one look at domestic economy-focused sectors and companies or do export-oriented sectors hold more promise?

The export-oriented sectors have performed better over the past six months. India had one of the most severe lockdowns. Hence, the economy contracted much sharper than other economies globally. We are looking at our portfolio strategy as a barbell. On one side are software, pharma, telecom that have fared well in the lockdown and have visible earnings growth, but are not cheap. On the other hand are sectors like cement and autos/auto ancillaries, which are recovering and have relatively not done as well as the other sectors. We are increasing weighting to these domestic sectors and reducing a bit from the first bucket.