ETMarkets Smart Talk: Global diversification for Indian investors is more like the abridged version of Alchemist by Paulo Coelho: Sreeram Ramdas

“Global diversification is surely a neat idea, but it’s more like the abridged version of Alchemist by Paulo Coelho – venturing into distant lands for a treasure, only to realise the real treasure was back home all this while,” says Sreeram Ramdas, smallcase manager & Vice President at Green Portfolio.

In an interview with ETMarkets, Ramdas said: “FIIs had been sellers due to valuation concerns, however, as time passes and earnings catch on, we believe FIIs may make a comeback” Edited excerpts:

Benchmark indices broke below Budget Day lows. What is spooking markets right now? What are your views?
Resilience of the US economy reflected in payroll growth, retail sales, inflation has been a prime reason for markets to price in a higher fed funds terminal rate of 5.5% compared to 5% at the beginning of February, this has spooked the Indian markets as well.

Further FII’s have been net sellers for three straight months, and we are seeing an exodus of retail investors from the markets which is further contributing to the negative sentiments.

If you look at the business performance of the broader markets excluding the Banking and Financial sector, margins have been negatively impacted despite revenues growing by double digits on a year-on-year basis, and markets have overreacted to the downside.

This is the last leg of panic. The broader market has been underperforming for the last 17 months, despite the recent bounce back, and we believe the worst of inflation and export demand slump has been priced in.

SEBI highlighting pump and dump trades is a welcome move – what would you advise retail investors on how they should consume info which is freely available?
As the old adage goes, there are no free lunches. If someone is providing you with free information or advice, its most likely not free after all.

There is no legal investment structure in India that asks you to transfer funds to the fund managers/influencers direct bank account. In professionally run entities with complete legal obedience, there will be a separate custodian.

The best practice is to refrain from sources promising returns, giving tips, or strongly expressing a ‘buy now’ rhetoric. No one can predict the stock market, and hence anyone promising returns is a big red flag.

What is your view on global diversification in 2023?
I am not a proponent of quoting India as an expensive market. Yes, on a price-to-earnings basis, India’s NIFTY 50 is trading at 70% premium to MSCI emerging market, but if we factor in economic growth and use a price-earnings-growth ratio, it becomes the most discounted market.

In 2022, we have seen the 60/40 traditional portfolio witnessing a drawdown of 17% as bonds and equities fell in tandem - as the genie named ‘inflation’ was out of the bottle.

Global diversification is surely a neat idea, but it’s more like the abridged version of Alchemist by Paulo Coelho – venturing into distant lands for a treasure, only to realise the real treasure was back home all this while.

When India is the fastest-growing major economy with a buoyant consumption market, and a push towards manufacturing as a cornerstone, we will not advocate for global diversification at this juncture, maybe a decade later.

What is your take on the GDP data which has slowed down? Do you think this could push away smart money?
Smart money will look through this lacklustre growth as quarterly GDP figures always have a noise factor and are influenced by base effect.

Manufacturing, exports and private spending did see a growth slowdown during the quarter as a result of rising borrowing costs and slowing global demand.

However, if you see, domestic output is on the rise and we are well above pre-pandemic levels; and the long-term growth story of India, it remains intact at 7% real GDP growth, and this is a reason for smart money to invest in India if anything.

What is your investment style amid volatility?
Our investment philosophy – the type of stocks and fundamental drivers we look for, remains the same. We continue to invest and remain invested in companies with world-class management, strong guidance, and solid overall fundamentals.

With the duration of interest rate cycles and market cycles shortening, our investment horizon has shrunk from ‘3-5 years’ to a ‘2-4 years’ bracket as stories are now maturing sooner.

Any portfolio additions or exclusions you have made recently and why?
Thomas Cook is a stock we recently exited from our High-Quality Right Price smallcase as industry tailwinds weren’t being reflected in business performance, while Piramal Pharma and Bharat Forge were the recent additions.

As I mentioned earlier, the broader market has been stagnant for more than a year now, and the tide is about to turn in their favour.

The companies doing marvellous value addition and having a moat in the market will lead the pack during the rally, and we want to heavily incline our portfolio towards companies doing value addition and limit exposure to commodity-type manufacturers.

As we enter the last month before we move to FY24 – your key learnings from the financial year gone by?
Market cycles have shortened and timing the markets is impractical. There may be a thousand macro factors and uncertainties which will impact the markets, but predicting them and continuously aligning the portfolio to those predictions is rather impossible.

When we analyse companies, we now assume a 20-25% negative impact to the top line and analyse whether the company would still report a profit and positive cashflow. As straightforward as it may seem, earnings and cash flows are what ultimately drive a business.

Which sectors do you see could do well in FY24 and why?
Chemicals, textiles, and pharma would be the sectors to outperform during FY24. These sectors faced the brunt of inflation in terms of higher input costs and thinning margins during FY23 and FY22, and when inflation began to cool down, they were impacted by softness in export demand.

Now their new capacity is being ramped up and they have streamlined their operations. The margins of these players should see a sharp improvement as demand picks up and operations stabilise.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)