Validus Wealth

Investors should periodically review and restructure their portfolios to get their investments doing well in every market cycle condition.

Cyclical sectors likely to turn around and look attractive, says Rajesh Cheruvu of Validus Wealth

Moneycontrol, 22nd October 2021, Rajesh Cheruvu

Investors should periodically review and restructure their portfolios to get their investments doing well in every market cycle condition.

With a change in the nature of economic cycles, cyclical growth sectors are likely to look more attractive. Most of these sectors have been underperformers for over five years. An improvement in capacity utilisation, emergence of a stronger rural economy, and an enhanced government spending support a strong demand outlook, believes Rajesh Cheruvu, Chief Investment Officer at Validus Wealth.

Investors should stay invested, and fresh allocations be staggered, as markets tend to get volatile after one-way rally in the past few months, Cheruvu says in an interview with Moneycontrol. Excerpts from the interaction:

The market is on a massive bull run. How do you assess the investor confidence in the backdrop of the pandemic?

The second COVID wave had caused a more severe humanitarian crisis than the first wave. Its impact on the economy, businesses, and the overall demand, however, have been minimal. This has helped restore investor confidence that the next waves of the pandemic would have a limited effect on the economic and market outlook.

The fiscal and monetary stimulus offered by the government also contributed to the revival in economic activity by defying deflationary trends of the past 10 years. Thus, the overall outlook has become more growth-oriented over the next 2-3 years.

Further, domestic MF folio additions and inflows have turned stronger in recent months, suggesting a return of investor confidence. This, combined with a shift in market-wide volumes favouring institutions from earlier retail led rallies, appears to be more grounded than earlier months.

The Midcap and Smallcap indices gained 50 percent and 66 percent so far in 2021. What would you suggest investors to approach these segments?

I believe, a revival of risk appetite and a flush in liquidity after the pandemic have led to the rally by restoring interests in mid and small caps. Also, a revival in cyclical growth around the world seems to be contributing to it. As a result, mid and small cap valuations offer attractiveness on a relative past average spread basis to large caps, although they appear expensive on an absolute basis in most cases.

Due to extensive balance sheet deleveraging undertaken by most mid and small-size companies and the absence of new CAPEX in the past few years, combined with improved demand outlook, contributing to relatively better earnings outlook. Conditional to sustaining the ongoing reflationary environment, these segments could benefit from expansion in earnings and valuations.

Given the run-up in the equity market, should the investors rejig their portfolios now? What is your take on the asset classes and the allocations?

The investors should periodically review and restructure their portfolios to get their investments doing well in every market cycle condition. Given the constructive economic outlook, the portfolios should be positioned to gain from the cyclical economic recovery with overweight allocation in equities and growth segments.

Also, other asset classes among financial asset classes appear less attractive for now; hence they could trail in returns to equities this phase of the economic cycle. Given the relative attractiveness in midcap valuations over largecaps combined with a favourable earnings outlook, midcaps are likely to outperform largecaps in the medium term. Historically, domestic liquidity-led rallies augur well for mid and small-cap performance.

What should be the investors’ approach in the current equity market scenario?

The investors should stay invested, and fresh allocations be staggered, as markets tend to get volatile and went one way in the past few months, and meaningful correction has not been seen for a while now.

Which sectors look attractive for investment now and why?

As the nature of the economic cycle is changing, we expect cyclical growth sectors to look attractive. These segments have been underperformers for more than five years or so. A recent RBI survey suggests that an improvement in capacity utilisations, revival in rural economy and government spending support a strong demand outlook.

Do you think that India is at the beginning of a bull run?

Put things into context, in the past seven years, India witnessed several structural reforms by both the government and the regulators. As a result, a reasonable amount of policy stability and aberrations got adjusted across industry segments. Indian banks and corporates have taken the deleveraging of balance sheets through asset sale, capital mobilsation and the NCLT process.

The absence of new projects by real estate players and RERA have given stability to the property prices, and helped them prepare for orderly growth. In addition, the RBI’s success in managing inflation over the past six years and monetary actions during the pandemic led to meaningfully lesser pain to the financial system and economy as a whole than any chaotic historical situation.

The government’s emphasis on indigenisation of the industry and alternative sources of energy is likely to ease import burden and currency stability. The government’s national infrastructure build-up and financing plan by shredding decade-long hesitation to expand the balance sheet by accepting higher fiscal deficit. Further, the roadmap to shred its presence in non-strategic sectors through strategic sales and asset monetisation programmes led to gaining foreign investors’ attention and market rerating.

Recent high-frequency macro data releases like improved mobility, tax collections, digital payments, order book growth and job additions point to a new economic cycle. Sustaining these gains could lead to healthy medium-term growth, translating into current market optimism.

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