When Nifty50 makes investors jittery about the course of the market, Rajesh Cheruvu, chief investment officer at Validus Wealth, favours equities as an asset class. Validus Wealth manages assets worth $1 billion.
Can add rate-sensitive stocks to portfolio: Validus Wealth CIO
CNBC TV-18, 8th June, 2022 Rajesh Cheruvu
When Nifty50 makes investors jittery about the course of the market, Rajesh Cheruvu, chief investment officer at Validus Wealth, favours equities as an asset class. Validus Wealth manages assets worth $1 billion.
Ahead of RBI’s policy outcome on June 8, Cheruvu tells CNBC-TV18.com that one can add rate-sensitive stocks to their portfolio with a higher preference for the banking sector, followed by automobile and real estate sectors.
With inflation wreaking havoc on corporate houses, the market veteran believes that investors should focus on owning stocks of businesses that are dominant market leaders that have pricing power and the ability to pass on higher input costs to the customers.
Here are the edited excerpts of an interview with Cheruvu:
Q. What is your current allocation like?
High inflation and ongoing policy tightening make the risk-reward ratio unfavourable in the fixed income space. Hence, we favour equities.
Q. Considering your firm serves HNIs and UHNIs, could you give us a sense of what’s their mood right now?
Investors continue to maintain a preference for equities, as they believe the growth outlook over the medium term is favourable. At the same time, compressed fixed-income yields and elevated inflation continue to make them weary of it.
Q. In April you advised people to continue buying large-caps. When you look at the prices now, do you find mid-caps and small-caps more attractive?
We aim to maintain the balance between the large- and mid-caps. The higher EPS (earnings per share) growth for mid-caps balances out the improved volumes for large-caps. Absolute trailing and forward PE (price to earnings) valuations for both are cheaper than short- to medium-term averages. Breadth, a measure of how many stocks are advancing relative to the number declining, has also fallen by two-thirds from the recent highs.
Q. You recently advocated investing in global equities as a way of diversifying your portfolio. Does that include big tech companies like Amazon, Microsoft, etc.? Do you think the sell-off there is over?
Investors can continue to allocate towards global equities as part of their structural allocation, and not just for chasing short-term returns. Technology firms and indices are down 20-50 percent from their 52-week highs and offer a good opportunity for long-term allocations. It remains to be seen how long the sell-off will continue with quantitative tightening exercises commencing this month and the upcoming Fed meeting, which will determine the extent of the next rate hike.
Q. The US bond yields indicate that the market sees inflation as having peaked. In India, too, a series of steps to curb price rise is at play. Would you advise investors to pick rate-sensitive stocks? If yes, how would you rank them?
We would rank rate-sensitive stocks in the order of banks, autos, and real estate, with each having different tailwinds and scope for generating returns. While banks have underperformed in the past year, large lenders are looking attractive with improved fundamentals. Autos may seem a bit expensive, but there may be a solid rebound in profitability, which is subdued due to chip shortages and raw material inflation. Low real mortgage rates and higher affordability make the real estate sector attractive, too, post the correction, with a focus on larger Grade-A developers.
Q. Do you see a pocket of opportunity that might benefit from rising inflation? Maybe an energy or agri commodity producer?
While rising inflation impacts all sectors, with certain sections benefiting more than others in the short term, investors should focus on owning stocks of businesses that are dominant market leaders with competitive moats in their respective segments. Such businesses would have the pricing power and the ability to pass on the input cost inflation. This places the firms in a better position to maintain margins compared to less dominant businesses, as well as maintain or increase their market share.
Q. Many market experts have pegged the decline in the rupee as the biggest risk for the year. Do you subscribe to the view?
The rupee may be under pressure due to the uncertainty around policy tightening, stagflationary pressures, elevated geopolitical risks, and a narrowing interest rate differential. However, rising crude oil prices may pose a greater risk, accompanied by a widening trade deficit.
The rupee has still performed better than other major currencies this year, and the depreciation so far is in-line with the long-term trend. The RBI has played a key role in managing the volatility in the rupee with regular intervention to avoid extreme swings. Foreign exchange reserves of $600 billion also provide the buffer needed for protection from any further external shocks.