Most mid, small-caps still trading below fair value: Umang Papneja

Risk-on sentiment has returned, with late-stage PE and pre-IPO investment gaining traction among wealthy investors, says Umang Papneja, senior managing partner and chief investment officer, IIFL Wealth. In an interview with Ashley Coutinho, Papneja says credit funds offer a good investment opportunity over a three-year period but one needs to dig deeper into the constituents of the portfolio before investing. Edited excerpts:

Indian equities are now trading at all-time highs. Has the market run ahead of fundamentals?

The equity markets rallied sharply after the unprecedented stimulus of the central bank earlier this year. The November rally was triggered by vaccine announcements while sectors related to economic recovery have played catch-up. There seems to be a valid concern around a new fast-spreading strain of the virus, but lower interest rates and central bank action will provide strong support to the markets. We are equal weight on mid- and small-caps. Although there are a few pockets showing signs of overvaluation, a vast number are still below fair value. Some catch-up is expected and we are unlikely to go underweight here in the near future.

Which sectors are you betting on after the pandemic?

Tech, pharma and many growth stocks performed well in the initial up move as investors latched on to growth candidates. After the vaccine announcement, investors have started switching to value stocks and economy-related counters such as corporate lenders, real estate, and public sector undertakings. This trend is expected to continue for some more time.

Has the risk-on sentiment returned among high net worth or wealthy investors?

Risk-on sentiment has returned and the first product category that comes to my mind is late-stage private equity and pre-IPO investment. Over the past few months, high net worth individuals have bought into established high RoE (return on equity) businesses like stock exchanges, credit bureaus, and even gaming. Real estate investment trusts have emerged as an important class as their relatively low co-relation to mainstream asset classes has made them an excellent diversification tool.

Are there any takers for credit risk funds, stressed asset funds, AT1 bonds, and private equity at this juncture?

A couple of years ago, yields of AT1 bonds of public sector banks were in double digits. This mispricing offered a huge margin of safety. Today most AT1 bonds have rallied to around 7 per cent and investors have witnessed huge gains. The risk-reward here is no longer attractive as in the past. Credit funds, over a three-year investment period, offer a significant spread over conventional AAA corporate bond funds. This offers a decent cushion for any accidents or possible defaults in the future. Yet, one needs to dig deeper into the constituents of the portfolio before investing. Similar is our view on stressed asset funds. 

Private equity has seen considerable interest particularly in late-stage and pre-IPO investment.

What is the broader impact of Sebi’s September circular regarding client-level segregation of advisory and distribution activities on the wealth management industry?

It is a landmark regulation and will improve transparency while bringing down overall costs. It will enable the emergence of new types of players in the financial space like ETFs and passive product manufacturers, fintech advisory platforms, and possibly much more disruption, which we have not imagined. Clients will emerge winners. We at IIFL Wealth will continue operating both as a distributor and as an advisor with clear client segregation.