Retail investors have grasped the power of equities: Vikas Khemani

VIKAS KHEMANI tells that the best risk management technique for investors is to invest in good companies with solid management capable of withstanding and managing volatility

With markets hovering near record high levels, VIKAS KHEMANI, founder of Carnelian Capital Advisors, tells Puneet Wadhwa in a telephone conversation that the best risk management technique for investors is to invest in good companies with solid management capable of withstanding and managing volatility. He believes that risk always comes unannounced and from unexpected sources. Edited excerpts:

Has calendar year 2023 (CY23) played out for the markets as you expected back in late 2022?

Yes, it has played out very well, in line with our expectations. Our flagship fund has delivered a 20 per cent return year-to-date with an alpha of 12 per cent, and our shift strategy has delivered 43 per cent returns in CY23 with an alpha of 33 per cent. The markets have exceeded our expectations.

Do you think that the Indian economy and the markets are not in sync?

I believe they are perfectly in sync. Our gross domestic product growth, goods and services tax collection, advance tax collection, and order book of capital goods companies are indicators that the economy is performing well.

Our interest rates are among the lowest. The spread between the US 10-year and India 10-year is at a historic low. No economy and market move in one direction, and we do not see signs of a bubble. Leverage, which is usually a source of bubble, is well within limits.

India is the only economy that has reduced its leverage since the global financial crisis. In the markets, too, due to regulatory tightening, leveraged positions are limited.

How should investors manage risk going forward?

No economy is fully decoupled in today’s world. The only good news is that the Indian economy is not significantly dependent on the US economy. Our exports should perform well even if the US economy slows down due to market-share gains from China.

The best risk management technique is to invest in good companies with solid management capable of withstanding and managing volatility. Risk always comes unannounced and from unexpected sources.

How do you see the liquidity situation playing out globally? Will India still be on investor radar?

Central banks are trying to engineer a soft landing for the economy, but it is easier said than done. We believe that interest rates have peaked and might hold steady for some time before starting to decline.

Emerging markets are the best plays when interest rates come down. Moreover, India is one of the most attractive markets globally.

India boasts the fastest-growing economy with numerous positives in terms of sustainability and stability of growth, and historical weaknesses are being addressed.

Our fiscal and current accounts are well-positioned, and growth is well-balanced among investments, exports, and consumption.

What has been your investment strategy in 2023 so far?

We have remained bullish throughout 2023 and have been overweight in banking, especially public sector banks (PSBs), midcap information technology (IT) stocks, manufacturing, capital goods, and pharmaceutical.

We have been underweight in the consumer and metal sectors.

That said, PSB, as a segment, is poised for a rerating over the next few years.

Midcap IT and chemical sectors also offer a favourable risk/reward.

Some small/midcaps, Defence, and Railways are overcrowded.

How do you see flows into the Indian equity markets, especially from domestic institutional investors and retail investors, playing out over the next six months?

Flows into equity markets will likely remain robust. Retail investors have grasped the power of equities. Our household savings are still far below their potential, with less than 5 per cent of savings invested in equities. This trend is expected to continue in the coming years.

Many have predicted a slowdown in retail flows in the past five to 10 years, but it hasn’t materialised. It is clearly a long-term trend for the next few decades.

Why are you bullish on the manufacturing/infrastructure theme? There are reports of a manpower shortage that could hamper projects, cause delays, and lead to cost overruns.

Manufacturing is a decadal theme. When we launched our manufacturing fund in August 2020, six months after the pandemic, we believed it was a decade-long trend. Manufacturing takes years to develop. It is in the same place where IT was in the late 1990s and is poised for significant growth.

The government’s focus on reducing imports, China+1 strategy, improved cost competitiveness, and long-term domestic demand are strong pillars of this growth, which will sustain itself for decades to come. Of course, areas of excessive exuberance should be avoided.

How are you approaching the consumption-related theme ahead of the festival season?

We have been very cautious about the consumption-related theme over the past four years. Inflationary pressures affect consumers the most, and most consumer stocks were highly priced. We witnessed a significant derating in that sector and expect it to continue for some time.

However, there will be a time in the near future when consumer stocks become attractive. There are selective stocks we like within our quality range at reasonable prices.