D-Street Voice: We are entering Capex Cycle boom period from 2020 to 2030: George Heber Joseph of ITI MF

George Heber Joseph, CIO/CEO of ITI Mutual Fund, is of the view that cooling off in commodities could be beneficial for India as we are entering into a Capex Cycle boom period in the coming decade ie. 2020 to 2030

Joseph brings more than 2 decades of experience and has worked with ICICI Prudential Mutual Fund in various capacities. He follows the philosophy of SQL (Safety, quality, and liquidity) approach at ITI MF, which has built an AUM of over Rs 2000 crore as of August 2021 after starting its operations in April 2019.

In an interview to Zeebiz's Kshitij Anand, Joseph said that we are structurally very bullish on the Indian economy and see domestic cyclical sectors quite attractive relative to markets from a medium-term perspective. Edited excerpts:

Q) How will the US Fed outlook impact equity, currency markets? Even though the clarity has emerged but can lead to a reversal of funds from FIIs?

A) The US Fed has indicated that the tapering will start soon. This will reduce the liquidity from the markets which is not good in general for various markets and, especially for sectors that have seen massive inflows in the last 10 years and have attracted money in the last 1.5 years post COVID-19 impact.

Hot money which has come will reverse but at the margin, India will see structural inflows from various long-only funds into India domestic-oriented sectors which are linked to the upswing in the economy as we have seen during periods like 2001-2010.

Q) What are your views on the impact of the fallout of Evergrande on the Indian market and sectors in specific?

A) We believe commodity sectors such as chemicals can be impacted materially if the real estate sector in China is bound to slow down provided because of Evergrande fallout.

Cooling off in commodities could be beneficial for India as we are entering into a Capex Cycle boom period in the coming decade ie. 2020 to 2030

Q) What is the investment strategy of your fund in picking winners?

A) Currently, we are quite bullish on the domestic investment cycle picking up and earnings growth to come through.

Therefore, we are structurally very bullish on the Indian economy and see domestic cyclical sectors quite attractive relative to markets from a medium-term perspective.

So, we are increasing early cyclicals like Auto, Auto Ancillaries, Banking & Financials, and Consumer goods stocks in our funds across market capitalisations because we see the significant margin of safety.

These sectors have not done well in the last 4 years because of the Covid impact and overvaluation they were trading in 2017. Since COVID impact is moving to the back burner these sectors are bound to do well.

Q) How are FIIs looking at India? They have turned net buyers after 5 consecutive months of being net sellers at least in the cash segment of the Indian equity markets?

A) We see the Indian earnings cycle improving after a long period of 10 years. In the coming years, earnings growth is going to accelerate from hereon. This is a big fundamental change and must be noticed quite closely.  

We are of the opinion that the economic cycle picking up is very good news for India and will attract more FII flows to India in the coming years.

Q) What is your call on markets for the next 6-12 months with Nifty eyeing 18000 and the S&P BSE Sensex hitting 60000?

A) We expect the market to compound at 13-18% CAGR in the next 10 years in sync with the corporate earnings growth prospects.

We generally don’t look at 6 -12 months market outlook, rather we look at stocks on a bottom-up basis, do research thoroughly, and try to select the winners.

Q) The market is rising on the backdrop of expensive valuations when compared to history? How does the number stack up for Nifty as well as for mid, and small cap indices?

A) The statement is true and some of the sectors are trading at ridiculously expensive valuation. But few pockets of the markets are trading at attractive valuations, mainly in the domestic-oriented cyclical sectors.

When earnings growth pick-up we have seen during the 2003-2010 periods market trades at very expensive valuations.

Since we see the earnings growing significantly, we do see a situation that the market that can move into high prices to book multiples.

Q) Which sectors will take Nifty50 from 18000-20000 in near future?

A) Auto, Banking, Oil & Gas, and Pharma can take Nifty to higher levels.

Q) The market is giving plenty of opportunities to investors to make money, but how should one avoid losing money in this market?  

A) Analysing the fundamentals of the companies, increase the quality of stocks as markets move higher and sticking to attractive valuation sectors & stocks will help to avoid losing money. Ultimately, strong companies and balance sheets will prevail.
 
Q) What is your investment philosophy? Has your holding in cash increased amid the recent run up?

A) We believe in SQL investment philosophy. ‘S’ stands for margin of safety, ‘Q’ Quality of the business, ‘L’ low leverage. We like to buy good quality businesses at an attractive valuation and hate leveraged businesses.

This helps us to be grounded on our bottom-up principles of research and take better investment decisions.

We have seen from our experience that this philosophy helps us to generate good risk adjusted returns over the long term.

We are quite constructive on the economy and markets. So, we don’t think this is the time to sit on cash, we believe if you have time on your side, 3-5 years, a considerable portion of the money should be clearly invested into equities even at this juncture.  

In a bull market, corrections will happen and can be quick & brutal but that will be short-lived.

(Disclaimer: The views/suggestions/advices expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)