Are markets overheated? Vinit Sambre of DSP Mutual Fund offers an elaborated perspective

Prior to the market correction we have been witnessing for the last couple of trading sessions, investor sentiment was extremely strong. As you must be aware, there has been a growing trend amongst investors to shun equity mutual funds and take the direct route to equity investing. For some investors, investing in equities has become as exciting as driving on an eight-lane express way, thanks to unilateral market movement. According to the data available on AMFI website, between April 2020 and November 2020, equity mutual funds have witnessed net outflows of Rs 11,147 crore. According to CDSL data, an average of 8.25 lakh new demat accounts have been opened every month during the same time period.

During the same period April, 2020 to November, 2020, FPI inflows have been in rising unprecedentedly at a time when the economic growth is at its nadir. FPIs have poured in Rs 1.57 lakh crore in 2020 so far. Clearly, 2020 has been a roller-coaster year.

On this backdrop we caught up with Vinit Sambre, Head of equities at DSP Mutual Fund. Vinit been managing DSP Mid Cap Fund since July 2012 and DSP Small Cap Fund since June 2010. In June 2020, he also took charge of DSP Top 100 Equity Fund, DSP Focus Fund, DSP Equity Savings Fund, and DSP Regular Savings Fund. Besides these, he has been overseeing DSP Healthcare Fund since November 2018.

Fund performance….

Long term orientation of the portfolios and astute stock picking has helped DSP Midcap Fund and DSP Small Cap Fund immensely to outperform their respective benchmark indices. The short term underperformance of DSP Mid Cap Fund has been on account of the conservative approach the fund house has followed towards mid and small cap valuations.

Data as on December 18, 2020
(Source ACE MF)

We began our discussion by asking him about market fundamentals vis-à-vis the liquidity position, to which he offered an elaborated and interesting perspective.

According to Vinit, Indian companies have rebounded sharply, and in many cases, faster than expected. Corporate India has adapted well to the growing trend of digitalization post lockdowns. And efficient managements have managed to convert this crisis into an opportunity.

Speaking about the slush of liquidity India has been receiving, he opined that, greater liquidity has been flowing  into emerging markets, especially since the outcome of the US presidential elections has come to fore. Perhaps investors might have concluded that the bigger risks are behind us.

The impact of the pandemic on emerging markets has been lower as compared to that on developed market economies. On the other hand, the growth outlook has improved in emerging market economies. Over the last 8-10 years, developed markets have outperformed emerging markets. Hopes of revival could also be one of the factors that has pushed investors towards emerging markets.

To the specific question of how much of the emerging market inflows would come to India, Mr Sambre presented some interesting statistics.

During the bull market of 2003-07, India accounted for approximately 25% of the inflows emerging markets received. This contribution dipped to a single-digit number over the last few years. This trend seems to be reversing now. Overseas investors including sovereign wealth funds and family offices have become more upbeat on India in recent times, Vinit pointed out.

When asked about the durability of liquidity that markets have been awash with, he exuded confidence that the markets may continue to receive ample liquidity at least for the next 5-6 months. However, faster than expected economic stabilization may trigger a pullback of liquidity.

He was quick to point out that markets have been already factoring in robust earnings recovery that may take place in FY22.

Average valuation of midcaps has historically been 0.5 times that of largecaps. At the peak valuation, midcaps traded at par with largecaps in 2017. At present, midcaps are quoting at the valuation of 0.75 times that of largecaps—which is slightly expensive but not frothy yet. The only way to cope with higher market valuation is to get equity allocations right.

Vinit also made an interesting observation about some companies witnessing a change of guard with the new generation replacing the old management, which is presenting unique investment opportunities. According to him, young managements of some companies have been more technology savvy and they have been making cleaner structures. On the other hand, he cautioned about some new generation leaders foraying into unrelated businesses without having much prior experience to manage them.

Walking the talk, Mr Sambre has cautiously allocated 6%-10% of the portfolio to cash and equivalent assets. DSP Midcap Fund usually holds 45-50 stocks in its portfolio while the stock count in DSP Small Cap Fund goes slightly higher, in the range of 65-70. Single-stock exposure is usually capped at 5%.

DSP Mid Cap Fund: top 15 holdings

Data as on November 30, 2020
Holding in %
(Source: ACE MF)

Mr Sambre sounded optimistic about the prospects of the Atmanirbar Bharat programme and highlighted that auto and ancillaries, IT, pharma, textiles and speciality chemicals sectors may benefit from the combination of factors—domain expertise of Indian companies, government push and benefits of low cost manufacturing.

DSP Small Cap Fund: top 15 holdings

Data as on November 30, 2020
Holding in %
(Source: ACE MF)

While auto, engineering and capital goods companies have been going through a down cycle, their outlook might change for the better if the capex momentum picks up, he felt. At the same time, he thought it’s important to monitor the performance of the banking sector beyond credit guarantees, it being the sector with the highest contribution to the index.

Key takeaways for investors

While keeping an eye on potential growth, one shouldn’t ignore expensive valuations. Given the current market circumstances, rebalancing one’s portfolio and realigning it to your risk profile appears a sensible move.

Important note (Please read as a disclaimer): None of the mutual fund schemes discussed in this article is a recommendation to buy hold or redeem. It’s merely an attempt to highlight the trend we observed. Hence, please consult your financial advisor before taking any decision pertaining to your mutual fund portfolio. Views expressed by the experts mentioned herein are strictly personal in nature and aren’t endorsed by Ventura Securities.

You may also like to read: Finally, value funds are outdoing the markets!

 

Disclaimer:

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

 

 

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