Why Kotak won’t use cash as a tool to manage portfolio performance
Synopsis
“Our corporate philosophy is not to take cash calls because it is a double edged sword. One may gain on a particular day when the markets are down but markets can also be very sharp in terms of recovery at various points of time. We have seen that during the Covid years,” says Harsha Upadhyay.
A few concerns keep lingering on. One is the commodity cost pressure across the globe and how that is impacting both interest rates as well as corporate profitability has been a cause of concern. We have also seen that most of the central banks have turned a lot more hawkish as compared to where they were a couple of quarters back.
That is also playing on the minds of investors. Whenever you see interest rates going up in an economy, we have consequent negative impact on equity valuations. One cannot have one to one correlation on a daily basis but definitely when interest rates are moving up in an economy, one will see equity valuations taking a knock across the global equity markets which are taking a reset in terms of the overall valuation impact.
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Our corporate philosophy is not to take cash calls because it is a double edged sword. One may gain on a particular day when the markets are down but markets can also be very sharp in terms of recovery at various points of time. We have seen that during the Covid years. If you have to look at a recent example, we really do not want to take cash as a tool to manage our portfolio performance.
We generally try to look at all the available sectors and stocks and see where there is relative comfort and make an attempt to build that position. Yes on defensive considerations, we may increase a little bit of cash in the portfolio. Our cash levels over the last year was around 2% or so, maybe today it is about 4%, but nothing beyond that.
Currently for the last couple of quarters, we have been trying to reduce our weightage in sectors where the valuations are very high because obviously the concerns were whether equity valuations will hold up or not. Consequently, we have reduced our weight in information technology, consumption sectors – both FMCG as well as consumer durables – and that has been the sector where there has been a larger decline. We have been able to insulate a little bit in terms of the fall that we have seen in the market.
As of now we are not really taking top-down sectoral calls in terms of picking sectors for further incremental investments. We are trying to look at individual stocks where we believe there will be reasonable steadiness in terms of earnings and where there has been a fall and a valuation cushion.
Stocks Recommendations
It is difficult to predict short term market movements but if you look at overall global macro, everything seems to be on the negative side – whether you look at inflation, interest rates or any of the central bank actions.
When one looks at local fundamentals, obviously the first half of the earnings season has been reasonably okay. We have met aggregate numbers as of now. But usually the second half of the earnings season is where you find more disappointments and also the management commentary across sectors is pointing towards further impact in terms of profitability, margins during June quarter and beyond that.
What is your reading of the earnings season so far? Are you expecting more downgrades to happen as we go into FY23? We have seen quite a few downgrades in Q4 and maybe from here on, some recovery will come into the picture. What is your base there?
As of now, the earnings scenario is holding up well. While there is a concern that maybe the 18-19% growth that we are likely to see during FY23 may not come through, but as of now, we have not really seen too many downgrades in terms of consensus numbers for FY23.
Our guess is some of the downside that we are going to see in consumption and manufacturing because of the commodity cost pressure is going to be compensated by higher earnings in commodities and oil and gas.
Overall there may not be a very large earnings downgrade but this is more of a valuation reset as I explained earlier as interest rates in an economy move up and equity valuations take a knock and that is what seems to be happening. If along with that, earnings also de-grew – which is not the consensus expectation at this point of time – or grow at a lower pace, then obviously there will be a double impact.