Recency bias, global cues underpin elevated valuations: Sailesh Raj Bhan

Overall revenue growth in the fourth quarter (Q4) is likely to remain muted as sectors like consumer staples and information technology (IT) struggle for growth, says SAILESH RAJ BHAN, chief investment officer of equities at Nippon India Mutual Fund. In an email exchange with Abhishek Kumar, Bhan highlights that quick-service restaurants (QSRs), large banks, select utilities, and commodity businesses are a few market segments that are still sensibly valued. Edited excerpts:

The correction in the small and midcap space was short-lived, with indices bouncing back to record high levels. What is supporting the high valuations despite these concerns?

The high valuations are upheld by several factors despite these concerns. Recency bias, stemming from strong returns over the past year, alongside a lack of attractive alternatives and a rally in key global equity indices, have buoyed investor sentiment.

Additionally, strong growth numbers across lead indicators such as tax collections, industrial activity, and power demand have contributed to soothing investor worries.

Did the March correction provide good buying opportunities? If yes, in which areas?

Some opportunities have emerged, although the correction was primarily limited to select speculative stocks. While the larger construct for India is positive, valuations remain elevated for most segments of the market.

However, certain segments, such as QSRs, large banks, select utilities, and commodity businesses, appear sensibly valued.

At the start of the calendar year, you were bullish on megacap stocks, especially banks. Has this view changed after the third-quarter results and the price change in the past three months?

The attractiveness of large and megacap stocks persists compared to a large part of the market. Recent market shifts indicate an improvement in relative returns for largecaps compared to other segments, unlike the past 12 months.

While large banks may face near-term margin headwinds, they present better pricing on a risk/reward basis due to low credit challenges. Moreover, large companies across sectors are trading at cheaper valuations than smaller-sized businesses in the same sector, potentially offering better risk/reward opportunities.

What are the expectations from Q4 results?

A considerable portion of margin expansion appears to have been captured in the last few quarterly results reported by companies. The K-shaped recovery and lower material costs have bolstered earnings growth in recent quarters.

However, overall revenue growth is expected to remain muted, particularly in sectors such as consumer staples and IT, which continue to struggle for growth.

Additionally, banking sector profitability in the near term is likely to be constrained due to high deposit costs and pressure on yields.

What is your recommendation to investors? Should they shift completely to largecap or multicap strategy?

In times like these, it is crucial for investors to ensure their asset allocation is appropriate. If the recent rally has skewed their portfolio exposure in any category, it’s advisable to rebalance accordingly.

While largecap allocation is vital for the sustainability and longevity of businesses, a multicap strategy provides diversification across market capitalisations, mitigating the risk of loss from unnecessary market timing calls that can go either way.

The key is to consider overall asset allocation and not overlook the compounding opportunity, even amidst volatility, by maintaining reasonable risk weights.

How do you plan to keep the schemes in the top quartile? Has the sharp rally in the past year warranted a change in approach?

Our investment framework is anchored on taking the right risks and avoiding overpaying for businesses, which are the first principles guiding our strategy.

As markets rally, the importance of this framework only amplifies, given the heightened importance of achieving risk-adjusted returns.

Our approach emphasises strong fundamental research and a robust risk management framework, ensuring that we deliver risk-adjusted returns to investors. This design lowers market bias and remains relevant across market cycles.