We definitely believe that the correction in midcaps and smallcaps have created some great investment opportunities. Many companies with strong fundamentals and positive outlooks are available at single-digit PE (price-to-earnings) multiples and very comfortable PB (price-to-book value) multiples.
Green Portfolio founder Divam Sharma believes there could be more volatility over the next 2-3 months but the major part of the correction in broader markets has happened and investors should be looking at deploying cash in a staggered manner over six months.
In an interview with Moneycontrol, he said investors who do not have fresh capital to invest could consider rebalancing their portfolios towards fundamentally strong companies in the midcap and smallcap space, as the markets hold a huge value creation opportunity there.
Do you think the measures taken by the government and RBI can support the rupee against the US dollar in the coming period?
80 is a psychologically important level to breach. We have seen the RBI taking measures, but outflows by foreign investors and high crude oil prices have hampered the efforts. We have also seen FPI AUC (Assets Under Custody) at April 2021 lows.
Even despite the fall in foreign currency reserves, the rupee has been making new lows over the past few months. There are also advance level efforts towards providing an alternative to SWIFT and ensuring rupee-denominated international trade.
Investors should also look at the inflation rate differential between countries to assess their domestic currency depreciation. After a long period, the US has seen such a high inflation rate.
Although, the levels of 80 can be breached, we believe that a major part of the rupee depreciation is done for now.
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With the softening of commodity prices, is this the right to time bet on midcap and smallcaps, where the correction is more than largecaps in the recent market fall?
We definitely believe that the correction in midcaps and smallcaps has created some great investment opportunities. Many companies with strong fundamentals and positive outlooks are available at single-digit PE (price-to-earnings) multiples and very comfortable PB (price-to-book value) multiples. In fact, these valuations are unjustified for businesses that are expected to grow at 20-30 percent.
The fall in commodities will reduce the pressure on margins. Nonetheless, most if not all of our portfolio companies continue to pass on costs with a lag, which will help in reinstating their margins. Fortunately, corporate debt levels are not a problem at this point.
We also did an exercise to check the impact of a 25 percent revenue fall and its impact on cash profits and found that most of our portfolio companies would have cash profits even in more stressed scenarios.
The US inflation print is above 9 percent, the Euro has broken parity with the US dollar, the US dollar index is a108… What do you make out of these developments?
There is definitely some trouble in the UK and Euro region with the energy crisis. A prolonged war can result in recession in the region.
The US market is pricing in a 30 percent chance of a recession in 2023. A lot would depend on inflation and on how much of growth would be impacted by aggressive inflation targeting through interest rate increases by the Fed.
We believe that a major part of currency depreciation should be done for now.
Do you think the Federal Reserve will hike interest rates by 100 bps in its July policy meeting, especially after the inflation print came in above 9%?
100 bps will be aggressive. But looking at the commentaries from theFed, it does not seem unlikely.
Over the last few days, we have seen a good double-digit correction in many commodities. If you look at Brent crude, there is a good 15-20 percent correction from the March highs. Food commodities like Wheat, Corn and Oats, which have been driving headline CPI, have fallen by 25-30 percent. Countries are adjusting to supply shocks by diversifying their supply chains, making new trade partners, and finding alternatives. Inflation should gradually plateau going forward.
Do you think the worst is yet to be over for the equity markets? Also what are the key reasons keeping the Indian market correction low compared to its global counterparts?
We believe that there could be some more volatility over the next 2-3 months. However, a major part of the correction in the broader markets has happened and investors should be looking at deploying cash in a staggered manner.
When FPIs were selling, domestic institutions were the counterparties supporting the market. We have also seen good continued participation and belief by retail investors in the India story through mutual funds and direct equity participation. We believe that the wealth tech platforms and fin-fluencers have really imparted a lot of awareness among investors over the past two years.
Where should retail investors put their hard-earned money now considering the volatility in equity markets?
We regularly interact with our clients and the general sentiment, particularly among new investors, has a high negative correlation with the markets. Investors who have seen the volatile side of markets over the last few years are slightly more patient.
If you have fresh capital, then you should deploy it in a staggered manner over the next six months.
If you do not have fresh capital to invest, then you can consider rebalancing your portfolios towards fundamentally strong companies in the midcap and smallcap space, as the markets are offering a huge value-creation opportunity there.
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