ETMarkets Fund Manager Talk: Risk-reward favourable in financials, cap goods, FMCG stocks: Arun Malhotra, CapGrow Capital

What’s your overall view on equities? Is the risk and reward evenly balanced?
From an investment perspective, the current market scenario provides a very compelling long-term risk-return award.

We believe the contradictions in the economic data, and the swings, may still persist for a few more weeks, but India will emerge stronger and unscathed from all the economic turmoil.

We want to maintain a high-quality bias in our portfolio. Valuations have become quite attractive, and a business down cycle overseas led by banking failures makes us positive on the recovery trade from here on.

How has your multicap PMSs fared over the last 6 months? Any major rejigs in the portfolios?
We have slightly underperformed the benchmark as of March 31 for a period of 6 months, while there is strong outperformance over a 2-year and 3-year time period.

However, in the longer time frame, we have outperformed the benchmarks. We have increased our conviction in our top bets. India’s GDP is poised to grow at +6.0% in FY24, and there are pockets of the economy that are showing resilience in the face of heightened uncertainty in the global economy.

The Indian corporate balance sheets are deleveraging and are in good shape. The domestic demand drivers are intact and a big scale-up in infrastructure investment from the government will have multi-dimensional multiplier positive effects on various core sectors of the economy.

Have you increased your cash holdings in recent months?
We on the contrary, have deployed cash and hold about 1-3% cash in portfolios, depending upon the strategy. We want to stay away from timing the markets and advise investors to deploy their cash in these uncertain times. Rather, we believe that these uncertain times provide the best opportunity to add to mid- and smallcap names to reap returns over a 12-15 month period.

What kind of portfolio allocation would you recommend for FY24?
India’s GDP is poised to grow at +6.0% in FY24, and there are pockets of the economy that are showing resilience in the face of heightened uncertainty in the global economy. The Indian corporate balance sheets are deleveraging and are in good shape. But export-related sectors like merchandise exports may get hit, while the rural demand is close to a trough and expected to improve going forward.

Crude oil prices have come down, coupled with the rebound in the services sector, driven by discretionary spending by consumers will keep the health of the Indian economy intact.

We plan to stick to market leaders, niche segment players, and keep an eye on corporate actions and announcements that can help us unwind value.

Smallcaps have seen a good correction over the last 1 year when compared to the largecaps. Which pockets in this segment offer favourable risk-reward according to you?
Small and midcaps are cyclical plays. Retail investors need to focus on smaller companies within the mid-cap and small-cap segments where the growth potential is higher.

Stocks of largecaps are already discovered by the markets and are unlikely to generate a large alpha going ahead, however they can generate steady returns and offer stability to the overall portfolio.

In the business model of a small cap company, one must observe whether it has a unique business or where competition is limited or where it has some key competitive moats in a particular business segment coupled with promoter integrity, scalability of business is to be watched out.

Favorable risk rewards are available in the financials, capital goods, construction engineering, container and packaging, food delivery companies, and FMCG.

Which sectors look good both from a valuation and growth perspective? Which ones are you bearish on?
Alternative energy sectors with focus on wind and solar power, new-age digital companies, companies with a focus on electric vehicles and components in the auto sector, chemical companies with more value-added products (China+1) strategy, banks, new age e-commerce, and payment aggregators.

We normally avoid cyclicals, B2C companies and the PSU pack.

If a retail investor has Rs 5 lakh. How should the money be deployed into equities?
We believe in 100% equity allocation post keeping aside 10% (known and unknown events) for any kind of emergency fund. Investing is rarely a straight line of success. There will be rocky bumps along the way.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)