While the banking sector faces serious concerns, NBFCs are the way to capture an economic turnaround, feels Kartik Soral, Fund Manager-Equity, Global Asset Management at Edelweiss. From April this year, he has become the fund manager of Edelweiss Absolute Return Fund and Edelweiss Diversified Growth Equity Top 100 (E.D.G.E. Top 100) Fund. Here are his views on the quality-versus-valuations debate and themes that can perform.
The move to quality stocks where there is earnings visibility has pushed up valuations there. What is your view on this? Would you look at sectors where valuations are low, but visibility poor?
Over last few years, barring few periods in between, quality has seen an unprecedented run up. This has been because investors, after the 2008 crisis, have realized that wealth is generated predominantly by compounding returns. Negative returns are likely to significantly reduce the compounded value of the portfolio over the longer term and it may better to lose out on some upside than to carry a risk of a large downside. Quality stocks have historically provided better safety.
We believe such a trade-off will continue to persist until there is an absolute confidence in the markets that growth is back – not only domestically, but globally as well – and that global liquidity rollback will not hamper it. Only at that stage, we may be able to see a roll-back of valuations for these quality names. This, we feel, is still some time away. While we are currently underweight metals and mining segment as the growth data is still not entirely supportive, we do like some names that have healthy cash on their books and follow attractive dividend policies.
You also seem underweight on banking and technology, a preferred sector, in your EDGE fund.
Many banks face obvious asset quality concerns, which we feel are not easy to sort out and will take time. A few banks have managed these issues quite well and we have held them in our portfolio. But, though we may be underweight on banks compared to the index, we have taken exposure to the financial services space through NBFCs which, we believe, stand in good stead to capture the turnaround in the economy.
The technology segment has historically defied odds to deliver consistent profitable growth and this reflects in the valuations that companies in this sector command. In recent times, however, the headwinds in the sector have been increasing and the businesses have become very susceptible to change. This is the reason for our current underweight position. We like the sector for its consistency and will continue to track it closely.
So do you follow a slightly contrarian approach in the EDGE fund?
No, it will not be right to say that we follow a contrarian approach in EDGE. However, given our philosophy and approach of trusting only hard data, we happen to sit out on most of the hope rallies. This approach helps us avoid unnecessary volatility that follows almost all such hope rallies, even though this comes at the cost of appearing contrarian and under-performing the market for short-term period.
Although we follow a sector agnostic approach to selecting stocks, we continue to be bullish on companies that have demonstrated healthy profitable growth in the past and continue to do so. Given this, we like some of the names in financials, pharmaceuticals, FMCG, and textile sectors. We believe defensives should continue to perform well in the wake of stable demand and lower input prices. Financials, especially housing finance companies, would benefit from an increase in economic activity and further reduction in interest rates.
What are the kinds of arbitrage opportunities that are available, and can these always be available across market cycles?
We do normal cash future arbitrage in our fund. Arbitrage opportunities are also available in index future and equities/futures of the underlying constituents of the indices, but currently we do not use this strategy. We have built our own systems that track the arbitrage opportunities available in the live market.
We have seen different market cycles during the last few years – in 2011 Nifty corrected by almost 25 per cent, in 2013 and 2015 we had a sideways market, and in 2012 and 2014 Nifty rallied more than 25 per cent. One thing that was common across all these cycles was consistent returns of the arbitrage strategies.
DISCLAIMER: Mr. Kartik Soral is the Equity Fund Manager at Edelweiss Asset Management Limited and the views expressed above are his own. These views alone are not sufficient and should not be used for the development or implementation of an investment strategy. Neither the AMC/Edelweiss Mutual Fund/Edelweiss Group nor any person connected with it accepts any liability arising from the use of this information and does not warrant the completeness or accuracy of the information.
Mutual fund investments are subject to market risks. Read all scheme related documents carefully.
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