Valuations are on the higher side for the market overall and also for the midcaps in particular, said Harsha Upadhyaya, CIO Equity, Kotak Mutual Fund. “So the corrections witnessed could be due to nervousness at higher levels”, he said.
He advises to tread with caution as the upside for the market seems to be capped. “Market is facing several headwinds in terms of higher crude prices, weakening currency, higher interest rates globally etc.,” said Upadhyaya.
According to him, the market has been resilient and has ignored the negatives so far, but one must be cautious and look for bets in the largecap space.
When asked where one should look for investment ideas, he said there was nothing in value zone but some themes such as consumption, cement are doing well.
“Cement looks good because things will only improve for the sector and there is no big capacity coming on stream, so the capacity utilisation will be high”, said Upadhyaya.
He said earlier the house was overweight on autos in all their funds but now they are only overweight on some of the rural dependent names like tractors and two-wheelers.
Watch: Time to be cautious on market; no call to move from equities to any other asset class, says Kotak MF
Edited Excerpts: Quite a bit of volatility in the market. What has led to this recent pain in midcaps?
Clearly, the valuations are on the higher side for the market as overall as well as midcaps, which have been trading at multiples that were not there historically. So, to that extent there is nervousness at higher levels and for us it seems like the upside seemed to capped at this point in time and it is time to be little cautious on the Indian markets right now.
What is little cautious? Would you not be a buyer now? You don’t have a choice you will get funds. Which is a safe haven?
The largecaps are a better bet at this point in time. There are many headwinds, if you look at globally, in US interest rates are on the higher side now. They have crossed 3%. In India, again it is looking like it is going to touch 8%. It is already at almost three year high. The currency is at about $68 plus, you have Brent crude which is going closer to $80, so there are many macro headwinds that are in front of us. Somehow market has been resilient and has been ignoring some of these negatives. But it is time to be cautious and look for opportunities in the largecap rather than mid and small cap at this point in time.
Within the largecap what do are you looking at? Where are the pockets to hide now? I mean the common view is that consumption stocks or even auto names are looking good. But there too valuations are sort of stretched, how do you approach it?
There is nothing which is at a value zone at this point of time given that the markets are trading at a valuation which is much higher than the historical range. So, to that extent you will have to pick stocks with an eye on the valuations.
While the consumption growth has been strong whether you look at urban-rural whether it is discretionary or staples everywhere the consumption growth seems to be very strong. But one has to relatively look at how these stocks are placed and then take a bet on the investment. So, to that extent even within the consumption sector it is not going to completely top down. So, you will have to have bottom up approach even there.
Your thoughts on cement because that is one space where you have an overweight? Stocks are making 52 week lows you recon the risk reward is extremely favourable here if the cycle turns?
We continue to believe that is a space where things are going to really improve from hereon. We have already seen the volume growth coming back into the industry. There is some pricing pressure, but we believe post monsoon that should also start to reduce.
So, given all this and the fact that there are no new big capacities that are coming on stream, we believe that the capacity utilisation rates will improve and hence the pricing power will also improve in that industry. So continue to remain positive on the sector.
You have been underweight on technology stocks and it is interesting because that is the only space that has performed I mean Tech Mahindra, TCS, Infosys are all at about 15-30% this year, you think things have changed a bit and would you change your stances?
We miss the IT rally in the initial phase. After that we have been little cautious given the valuations that are improved and have become more in-line with market valuation I would say.
There was a zone where the IT valuations were below market and there was bit of a valuation catch up that has happened. So, from hereon it won’t be that much of a valuation catch up. But yes given the headwinds that I mentioned maybe it is a defensive pocket to look at. So, to that extent we have bridged our underweight stance in the IT sector, but really not looking at it as a large over weight sector even at these levels.
In the midcap IT space, I take your point about front liners because it seems like a lot of the action has played out, but you think there is still more value in midcap names the Hexaware, the Cyient?
Many of the midcaps have been trading at the multiple which is much higher than that of largecaps in the IT sector and also compared to their own historical valuations the valuation there seems to be much higher. So there is some bit of a risk in a midcap IT names.
Today, everybody is rushing towards safety and putting money into some of these defensive segments. But clearly if growth doesn’t sustain from hereon or if there is any hiccup then the valuations which are quite rich can lead to substantial correction.
You still remain overweight on auto because some part of market thinks that the big rally is over in that?
Earlier, we were overweight on auto across all our funds, now I don’t think across all our funds we are overweight. Even that is essentially coming from some of the rural dependent auto names such as tractors and two-wheelers. So, to that extent there has been a shift within our auto basket in terms of investments in the last six months.
One trend one could discern in April import-export numbers is that several categories of exports have done exceptionally well. I mean chemicals, engineering exports, transport equipment’s quite a few things did extremely well so now of course there is a rupee tailwind for them as well is that a theme?
We do have overweight on some of the exporters in the capital goods arena as well as in the chemical space, but again these are not very big sectors to really have large investments into these sectors. On a bottom up basis we like quite a few of them and they have been there in our portfolios.
At any point as a fund you would look at equities, but overall Kotak would say that time is better to move from equities to bonds part of the cash, rebalance?
One has to maintain prudent asset allocation, but beyond that I don’t think there is a call to shift from equities to any other asset class at this point in time. Because even when you look at bonds, I don’t think that there is a clear sense in terms of where the yields are moving and in the short-term we believe either it is going to be a long pause by RBI or maybe there will be a hike in the second half of this year.Given that I don’t think you can really expect a lot of upside in fixed income as well. So it has to be an asset allocation that would suit each ones risk profile. Beyond that I don’t think there is any call about any overweight on any of the asset classes.