Dalal Street Voice: This fund manager is underweight on metals and power; positive on pharma, digitization themes

Srinivas Rao Ravuri CIO, PGIM India Mutual Fund said that he is underweight metals and power sectors, but continues to remain positive on digitization, healthcare, and manufacturing themes.

Srinivas has over 24 years of experience in Indian financial markets, primarily in Equity Research and Fund Management. 

In his last assignment, Srinivas was Senior Fund Manager – Equities at HDFC Asset Management Company Ltd. He has also worked with Edelweiss Capital Ltd., Motilal Oswal Securities Ltd, and Securities Capital Investments (I) Ltd., in the past.

In an interview with Zeebiz's Kshitij Anand, Ravuri believes that after delivering healthy returns for two consecutive years, one should be cautious about the near-term performance and be prepared for increased volatility as interest rate hikes are imminent across the world. Edited excerpts:

Q) A strong close for the year 2021 for equity markets – what are your expectations for the year 2022?

A) We are cautiously optimistic about markets for the year 2022. After delivering healthy returns for two consecutive years, one should be cautious about the near-term performance and be prepared for increased volatility as interest rate hikes are imminent across the world.

Strong earnings growth and steady flows into equities are two positives.
 
Q) What are your expectations from the Finance Minister on Budget 2021?

A) The government has been announcing several measures to lift the economic growth, and we expect this trend to continue.

They don't need to wait for the Budget. We should reduce expectations from Budget announcements.

Q) Some of the sectors that did well in 2021 were power and metals, which house some big PSU names as well. Do you think these sectors could continue to remain in focus in 2022 as well?

A) We have seen a sharp increase in commodity prices, including metals in 2021, this is unlikely to be sustained and one should be taking only tactical calls on stocks that are dependent on global cyclical.

We are underweight metals and power sectors. We continue to remain positive on digitization, healthcare, and manufacturing themes.

Q) How do you view new-age companies that hit D-Street in 2021. But, when growth looks more lucrative than value – how do you take your pick? Being a value investor – what percentage should one keep in the portfolio?

A) The common thread across a number of new-age companies in India (and globally) are:

a. Using technology to bring efficiency and bridge any existing gap
b. Being fiercely client-focused
c. Disruption of existing delivery model is often collateral damage rather than outright objective

With the rise and penetration of the internet and e-commerce, delivery through technology is getting better by the day. Surplus liquidity and near-zero rates have ensured that funding is also not a challenge.

A lot of these new-age companies have brilliant business models. Most of them (not all) have a sharp focus on market share gains, but not much on operating cash flows (as constant funding takes care of any deficit).

However, cash flows would be eventually required for these companies to become long-term compounders.

Given the buoyancy in the stock markets across the world, these new-age companies are trading at expensive valuations and majority of them are bound to be value destroyers. One should be careful about investing in them.

We focus on companies with positive operating cash flows in at least 7 out of the last 10 years (70% in case of history is less than 10 years)

Q) More than Rs 1 lakh cr was raised from primary markets in 2021. What are your expectations from 2022 on the quantum of money and any big companies which you are looking forward to?

A) The IPO market has become a seller's market as markets have been buoyant, and some IPOs delivered great returns on listing.

We have avoided participating in the majority of the companies that went public recently as we find either valuations are expensive, or business fundamentals are inferior.

We believe that 2022 would be a challenging year for investors and companies planning IPOs.

Q) In terms of asset allocation – how do investors plan their investment journey in 2022?  

A) While markets can swing from a bear phase to a bull phase and back, the long-term returns are generally correlated with nominal GDP growth.

With India’s nominal GDP growth estimated to be in the low double digits, having long-term expectations around the nominal GDP number would be a wise thing to do.

Investors should be prepared for lower returns and increased volatility in the short term. Overall, asset allocation (staying invested in equities), patience, and homework are most important for investors.

Q) Equities delivered many multibaggers in 2021 – do you think 2022 will also be as thrilling for investors look to double wealth outsmarting other traditional asset classes?  

A) The year 2021 has been the epitome of investing. Markets started rallying much before fundamentals began improving, and as markets remain buoyant, we started seeing excesses in certain pockets, including IPOs.

And now we are witnessing a correction as concerns emerge on multiple fronts. Overall, asset allocation (staying invested in equities), patience, and homework are the most important lessons.

Q) Where is the smart money moving, especially at a time when we have seen 2 back-to-back years of gains in equities?

A) Contrary to expectations, emerging markets have underperformed developed markets in 2021 as FII started selling from emerging markets in the second half of 2021.

The direction of FII flows will have an impact on market movement. Asset allocation and diversification are two important facets of wealth creation.

Indian equities have generated healthy returns in the last two years, investors should look to diversify their portfolio by increasing allocation to global funds and REITs, etc.

Q) What do you do when you are not managing money?

A) I spend time with my family including two daughters, playing tennis and being close to nature – in the hills.

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