In an exclusive interview with Krishna Bahirwani, Harshad Patwardhan, CIO – Equity, Edelweiss Asset Management Limited discusses the various factors affecting the markets at the moment and where investors should park their money.
Krishna: Volatility has made a major comeback after 2017 which had more or less upward momentum, do you believe it is here to stay?
Harshad: In a way 2017 was a very unusual year of very low volatility whereas high volatility is normal for our markets. If you look at any year apart from 2017 going backwards, there are ups and downs that happen in the market. Granted that 2018 has been a very bad year particularly for midcap and smallcap stocks, but high volatility is something we should expect going forward also. Maybe not the kind we have seen this year, but we are unlikely to have years like 2017 very often.
Krishna: Even after the recent correction do you believe market valuations are still high? Do you see scope for further corrections?
Harshad: Largecaps, midcaps and smallcaps have behaved very differently this year. In largecaps, if you look at Sensex, for example, it is up 5% this year. Midcaps, on the other hand, are down 17-18% this year while smallcaps are down even further at around 30-31%. A lot of valuation correction has happened in terms of midcaps and smallcaps whereas largecaps haven’t seen much correction. Post analyzing what has led to this correction; it is clear that it is not due to fundamental deterioration. There are many good quality companies that have had earnings improvement over the last year, but the stock prices are down in companies like these, hence the valuation correction is even steeper. You could still potentially see re-rating of smallcaps and midcaps or further correction in largecaps.
Krishna: Despite BJP losing all the states during the current state elections, markets have held it together. Why do you believe that is?
Harshad: We are still trying to figure what explains this. Around the time of the election result, another significant development also took place which was the resignation of the RBI governor. The market could have backed the view that election was an event and now the event has passed, and on a going forward basis, things should be okay. Everyone knew that this event was about to take place and the exit polls had already predicted that BJP might not do well. It is a widespread belief that people buy based on rumour and sell based on news, this time it happened the other way around. However, cannot state with 100% certainty that this is why it happened.
Krishna: What do you believe is an ideal asset allocation for the next two years?
Harshad: Asset allocation depends on the circumstances of the particular investor. It is important to factor in things like age, what stage of his life and career he or she is in. Asset allocation is a function of a lot of these types of characteristics, so it is very difficult to give advice that suits everybody. This is also why we are very particular about mentioning that retail investors should seek the advice of financial advisors to decide their asset allocation. However, what we can suggest is that within equity if your risk appetite is a little higher, this is the time to allocate more money to midcaps and smallcaps. This is because of the steep valuation correction we discussed and also once normalcy returns we will see better returns coming from the midcap and smallcap space.
Krishna: Are there any specific sectors that you believe warrant special attention going forward?
Harshad: Going forward, one may need to be quite fleet-footed because things can change quite dramatically, especially since May 2019 is going to be another big event where the general election results will be announced. As things stand today, private sector banks and consumer durable companies look good from a medium to long-term perspective.
Krishna: Market veterans across the board talk about equity outperformance over the very long term, if you were to create a portfolio for the next ten or fifteen years, what sectors or what kinds of stocks would you pick for such a period?
Harshad: For mutual funds, if investors have such a long horizon, it is recommended to look at a diversified midcap portfolio. We have looked at the numbers and the longer the time horizon, the bigger the chances that midcaps will outperform largecap stocks. As far as direct equity goes, ten or fifteen years is a long time, and many things can change, that one should be aware of. Let’s assume that there is a very high-quality business with a very good track record under particular management. In a few years, it is possible that the management might change and then you have to re-evaluate, or it is possible that some new entrant might come and disrupt the market. Just because the company has done well over the last fifteen years doesn’t necessarily mean that it will continue to do well over the next fifteen years. Investors should not buy and forget, our view is that they should keep reviewing their portfolio at regular intervals. This should be at least once a year if not more.
Krishna: In your opinion, can one look at including international funds as part of the long-term mutual fund portfolio?
Harshad: International funds can provide additional diversification benefits to the overall portfolio of the investors. In addition, if an investor has a strong view on a particular country doing well in the long run; exposure to this kind of a theme is possible using the appropriate international fund.
Disclaimer: The author is an active investor in Edelweiss Capital. Mr Harshad Patwardhan is the CIO – Equity of Edelweiss Asset Management Limited (EAML) and the views expressed above are his own. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.