Unexpected election results will have a major impact on markets. The budget announcement in February will be the next major event, says Divam Sharma.
In an interview with Moneycontrol, Divam Sharma, Founder and Fund Manager at Green Portfolio, PMS, stated that their exposure to the power sector is very low, and they are not planning to increase their positions until the valuations become more favorable. Sharma believes that there has been a significant surge in the power sector recently, with companies across the power supply chain witnessing a strong rally.
Sharma, a Chartered Accountant with over 13 years of experience in investment management in stock markets, plans to diversify a major portion of his Rs 10 lakh investment among 11 smallcap stocks that he has high conviction in, particularly in the 5G, pharma, and chemicals space.
Q: Are the valuations still looking attractive in the power sector, even after the recent run-up?
Supply and new installations have been ramped up post-COVID to meet the excess power demand. This is in an industry with low entry barriers and a situation of oversupply is very likely. Valuations are being dictated based on the inclination a company has towards renewables.
The recent run-up has been phenomenal, and companies across the power supply chain have witnessed a powerful rally. With that being said, our exposure towards power is razor thin and we aren’t looking to add positions until the valuations become comfortable.
Q: Which are the sectors/themes that you selected for investment for 2024?
Besides pharma and chemicals, 5G is the space we are leaning towards. Most of the 5G equipment manufacturers are essentially assembling Chinese parts and selling them in the market. We have identified unique small-cap names, a couple of them, that will be major beneficiaries as our reliance on China reduces.
During the last two years, chemical companies ramped up their capex only to realise that demand dissipated by the time their new facilities were online. Due to this, their margins went through a stressful period. Now, we are seeing MNCs rerouting their sourcing from China to India, margins coming back as capacity is being ramped up, and lower inflation contributing to slightly higher margins. Chemicals, Pharma and 5G as a theme, we expect to do well in the coming years.
Q: Do you expect similar (2023) returns from the equity benchmarks in 2024 too? Factors that you think are already discounted by the market?
2023 has been a superb year. At the beginning of the year, we were at highly discounted levels. The Smallcap 250 index price-to-earnings were at 17x, and now we are 27x.
From a high level, valuations have become more expensive. A large part of election euphoria has been discounted by the markets, expecting the incumbent government to take the helm in 2024. Lower oil prices and steep fall in inflation are very well factored by the markets now.
Q: Where do you want to invest for 2024, if you have Rs 10 lakh?
I would diversify it among 11 high conviction smallcap stocks, especially in the 5G, Pharma, and Chemicals space. I would keep around 2-3 lakh in short-term interest-earning liquid funds. Exposure towards capital goods and FMCG would be slim.
Q: Do you expect the DIIs and retail flow in equity to remain strong in the coming year too, or much more than the previous year?
Yes. As disposable income increases, the DII and retail flows will continue to remain strong for the next few years. Indian markets have been resilient from FII outflows thanks to the DII money. As equity as an asset class gains traction among the larger population, we should see more retail participation across age groups.
From our experience and given the data of over 30,000 retail investors, most investors are aged between 26-35. We see lower participation with age after the 35 midpoint. Equity participation is more like a bell curve.
Q: Do you expect the Fed to start an interest rate cut in the first quarter of 2024 and will it be more than 3 cuts in 2024?
Predicting several interest rate cuts or rises has proved to be a losing game. The Fed will target a long-term range of 2-2.5 percent. Given the fear of disinflation, it is very likely for the Fed to cut interest rates in 2024.
Q: Are you super bullish on the PSU space, even after the stellar run they posted in the past quarters?
We are not leaning into PSU’s at the moment. Even before the rally, we had low exposure to PSUs. We would want to stick with our philosophy of sticking with the high fundamentals private players where value creation is assured.
Q: How do you summarize the year (2023) passing by?
Stocks don’t stay undervalued for long. Coming into 2023 small-caps were facing severe selling pressure despite having many positives going for them. For the rest of the year, post-March, we have seen a relentless rally with companies getting the valuations they deserve. This year has been a bumper year for Capital Goods, Railways, Infra, Power and Banking. The year has also shown how resilient India Inc is to rising interest rates.
Q: What are the factors to consider in 2024 that can support and dent the market?
Unexpected election results will have a major impact on markets. The budget announcement in February will be the next major event.
We have two ongoing wars that could have a direct impact on commodity prices, any slowdown on that front would be much appreciated by the markets. Moreover, how Indian companies perform during a possible recession in the US is another factor to watch for.
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Reference Link:- https://www.moneycontrol.com/news/business/markets/daily-voice-this-expert-plans-to-diversify-his-rs-10-lakh-investment-among-these-11-smallcap-stocks-11946131.html/amp