In an interview with ETMarkets, Parmar said: “Invest with a margin of safety and only in companies which have valuations on our side and where Corporate Governance is good” Edited excerpts:
We are seeing some nervousness as we hit fresh record highs on the Sensex and record closing high for the Nifty. What is causing the nervousness?
We have hit new highs. There was some nervousness before it actually hit a new high. I think the primary reason was the ‘monsoon’. Now with the advent and decent spread, markets seem to have shaken that worry.
We have been positive on the Indian markets as the Indian economy has been doing well compared to all other major economies.
A shining armor, if you will. New highs generally don’t mean much to us. We are extremely focused on what we have and what we want to buy or sell.
What is the kind of impact you see on sectors after PM visit to USA? Do you think Make in India could get some additional boost?
I think it was a historic visit. We see many benefits. Defence sector is an obvious beneficiary.
At the same time, we have to be cognizant of the valuations of many stocks in the sector. A lot of the good news may be priced in.
So, tread with care. The risk-to-reward ratio may not be in favor of many. ‘Make in India’ can definitely get a boost. We are entering a phase where we can manufacture for the world. Where do see the markets in 2H2023?
We generally avoid making any short-term predictions. We think it’s a futile exercise. We must learn to focus on individual businesses/sectors. We have positioned our coverage on stocks/sectors in 2 ways –
1) where we have already witnessed a turnaround. For eg. Capital Goods, a sector which we had recommended in 2021. We continue to monitor these closely. And would like to stay invested in some.
We have booked out of some names purely from a risk-reward perspective and alternative investments offering better risk-reward.
2) stocks/sectors which face temporary headwinds where long-term story/tailwinds are intact. Basically, a contrarian approach.
And we have slowly been building positions in these. Some examples are sectors like chemicals, Agrotech, Pharma/API
Realty, and Capital Goods indices saw maximum traction with gains of over 20% in the first 6 months – do you see the momentum continuing?
As mentioned above, Capital Goods is a sector where we were early and has been our best-performing sector. We continue to be selective and hold some.
At the same time, we have booked profits of some for better opportunities in other sectors. It has to be a stock-specific approach.
Any new investments must be made with care as many might be at fair valuations or overvalued. Realty is also a sector where one should be invested in. As upcycle should last for quite some time.
Real Estate upcycles and downcycles are historically longer. And we have come off a long downcycle.
Utilities as well as oil & gas stocks have not done much even though we touch record highs on the Sensex. What led to the price action?
We do like a few from this sector. Primarily some OMCs (Oil Marketing Companies), had a very difficult FY23 due to under-recoveries when crude was high. Crude has cooled down and marketing margins are very good for these companies currently.
We can expect far better performance and increased dividends. It should also be watched when will the government reduce fuel prices. We think it can happen in the future. Do review these investments at that point.
These are cyclical in nature and heavily dependent on government action and hence we tend to avoid very long-term investments in these.
Any key risks which investors should watch out for in 2H2023?
One key risk is a delay in interest rate reductions, especially in the developed world. Or a longer pause than expected. Inflation in the developed markets is still a risk and some policy-makers are still increasing rates.
We should be aware of these risks. Also, India does have a political risk in the general elections of 2024. A continuity of reforms is required as we are in a sweet spot and on an inflection point. We have waded the last few years superbly and credit must be given to RBI and the government.
Without getting political, a continuity of the current dispensation is something I would prefer. Purely from a market perspective.
US, Euro Zone, Japan, South Korea, Taiwan, and India – touched 52-week/record highs. This was partly on expectations that interest rates would be near a peak. Where is the trend headed – and will further hikes dent FII flows?
As discussed above, interest rate risk is a significant risk. India has been attracting lot of inflows currently. The runup from April onwards is primarily due to this. Rate hikes do remain a risk.
At the same time, there could be some further inflows due to some countries moving out of EM to developed nations. Maybe something like South Korea. On the small and midcap front, the runup is due to very good flows into small and midcap funds.
From my interactions, most retail direct investors have missed the rally from Apr 2023 till date. And hence must avoid FOMO.
Invest with a margin of safety and only in companies that have valuations on our side and where Corporate Governance is good.
What is happening with the Sugar sector amid a rise in Ethanol prices?
Sugar sector has become less cyclical. Due to the ethanol factor. Look at companies where revenue and profits are increasing due to this vertical.
Sugar is a political commodity and has been one of the best-managed commodity by the government for the last many years.
Excellent vision and implementation. This sector was plagued with huge overdues to farmers due to excess production, non-remunerative prices, etc.
The government has effected a fine balance and ethanol is a big cog in this wheel. We remain positive about selecting names in this sector. At the same time keep a close watch on FRP and SAP as we enter the election year. That is a risk.
How should investors play the small & midcap theme?
With caution. Though we believe this space will give better returns than the largecaps. But stock/sector selection is key. There are many good companies and there are an even larger number of un-investable companies.
Independent research becomes very important. Quality of management and corporate governance are very important factors.
One should delve only if one has the aptitude to do research, understand business/sectors, are able to assess management, and able to digest higher volatility.
(Jiten Parmar is SEBI registered. Registration No: INH000008118)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
