Dalal Street Voice: Include new generation businesses which can be multibaggers of the future in portfolio: Sandip Sabharwal

Long term investors should be focussed on established businesses that have done well over the years combined with some new generation businesses which can be multibaggers of the future, Sandip Sabharwal of Asksandipsabharwal.com said in an interview with Zeebiz’s Kshitij Anand.

Sandip is part of equity markets for 25 years now and has managed mutual fund schemes for over 15 years.

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He is of the view that the Indian economy still has a long way to go, and a stronger growth cycle normally creates good wealth for long-term investors.

Edited excerpts:

Q) What do you make of the price action on D-Street – Sensex touched 60,000 while the Nifty50 also hit 18000 milestone. Time to be cautious or just ride the momentum?

A) The Nifty50 reached 18000 this week, and the move in the Indian Markets has been incredible with a complete lack of correlation of India with the world or emerging markets.

The market looks very frothy with retail traders believing that it can’t be correct. Valuations are now the highest since the year 2007 and Market Capitalization to GDP has crossed 135%.

As such, the near-term risk-to-reward ratio has become even more unfavorable than what it was at the beginning of the month.

History suggests that bull market sell-offs come suddenly and are deep and sharp and it takes out weak hands. It makes sense to generate and hold cash in a strong market to buy when markets sell-off and everyone tries to push the exit button.

Q) One good thing which has come out in the last 12-15 months is the fact that reliance on foreign investors to push the market higher has come down. The Indian market has remained resilient which is a good thing. What are your views?

A) While this is true in the short run, we also need to understand that this kind of move shifts the flows from more informed investors to those who are most likely playing the momentum.

The growth of the equity culture in India is a definite positive. Indians largely had a bad asset allocation mix earlier which has started to correct.

There are two types of investors domestically. Those focussed on the long term and for them systematic investment is a good thing. However, momentum investors always get burned and they need to be careful when markets are elevated.

Previously, we were only dependant on foreign investors’, and it is good that domestic flows provide a cushion to those flows especially at the time of volatility.

Q) If someone has a long-term view on say 5-10 years – how should one approach the markets?

A) Long Term investors should not be very worried with the volatility in the near term. However, investors need to stagger their investments when markets are elevated.

This adds to long-term returns. Timing the markets combined with time in the markets works very well as a strategy.

Long-term investors should be focussed on established businesses that have done well over the years combined with some new generation businesses which can be multibaggers of the future.

The Indian economy still has a long way to go, and a stronger growth cycle normally creates good wealth for long-term investors. Demographics are also in India’s favour. We feel that long-term wealth creation via equity investing should play out well.

Q) Looking at the energy crisis especially in China and Europe – do you think investors can put some part of their portfolio in energy and power (PSU) stocks that are still available at reasonable valuations?

A) These allocations can only be tactical as once supplies improve and winters pass we will see things normalize. Short-term events should not be used to make long-term strategies ideally.

The energy and power sectors have some structural issues which still have not gone away.

Q) Which sectors are likely to lead the next leg of the rally and why?

A) One interesting factor that came out of various management commentaries has been that most companies are looking to do significant capital expenditure. This should now after more than a decade lead to a new private-sector Capex Cycle.

This will create opportunities in some under-owned capital good and infrastructure stocks. This is a good opportunity space in the current elevated markets and on corrections.

Besides this new generation, technology-based sectors will also see wealth multiplication over the next few years. Some Indian export-oriented industries will also see benefits due to shifts from China.

Q) You have seen many bull and bear cycles in your career. Do you think this bull market is different and what is the kind of strategy you are following for your fund?

A) Most bull markets are similar though the pace of moves and the way many stocks and sectors behave are different. At this point of time given the extreme euphoria, I am looking to increase cash levels to deploy when valuations become reasonable.

Markets in India have totally ignored all global cues. If our move came due to global liquidity, then we cannot argue on the other side when markets do not correct.

Most global markets are down 6-20% from the peaks while we are down just 2%. This increases risk in the short run. Its best to protect some gains at this stage.

Q) Should one tweak the asset construction of their portfolio especially after 27-28% rally seen in benchmark indices? Should one go underweight on equity and increase weightage in debt?

A) Equity weightage depends on your current allocation and strategy. If you are a passive SIP kind of investors’, then it makes no sense to keep on changing your strategy.

However, if you are an active investor and have made much higher-than-average returns over the last one year then it makes sense to take out some profits, go 25-35% into cash and wait for better opportunities.

Debt also has challenges as yields are at lows as such low-risk funds like liquidity, ultrashort term or Bank Deposits should be preferred.

Q) What are your views on broader markets? Small & midcaps outperformed benchmark indices by a wide margin. How do they stack up valuation-wise compared to historical averages?

A) Small and Midcap valuations, in general, have gone way above long-term averages and compared to large caps. As such risk is higher there. However, in recovering economy new opportunities come up all the time and to that extent generalizing a view might not be the right thing to do.

So, I would say that in the short-run risk-reward is unfavorable. But, in the long-run opportunities are immense.

Q) How to pick stocks when everything seems to be looking expensive compared to historical averages?

A) Given the interest in the equity markets contrarian investing works well. We need to look for undervaluation relative to markets, companies that might have fundamental triggers which the markets are ignoring and move into under-owned value stocks that could have some growth triggers.

Overall markets are expensive at this stage. However, bull market corrections are fast, swift, deep and get over in few months. That is the opportunity for investors who are patient.

Q) The IPO pipeline remains strong for October-November as some 30 companies are collectively looking to raise about Rs 45000 cr. Which big companies are on your radar, and your views on the IPO action we have seen so far in 2021?

A) IPO’s have done well in general. However, the valuations of IPO’s have kept on increasing and most of the IPO’s now leave little on the table for investors.

Many of these companies are listing at valuations much higher than other established companies in the same sectors. This is unsustainable. I would say investors should be cautious on IPO’s.

On the other hand, some unique companies are also getting listed. These will at some stage come to good valuations and that will be the time to buy into them.

Disclaimer: The views/suggestions/advice 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.