`Keep off IPOs for now, focus on high-quality company stocks'

With Samvat 2081 (the Hindu New Year) knocking on the door, Krishnan VR, chief of the quantitative research team at Marcellus advised investors to look for high-quality companies with clean accounts, returns on capital greater than the cost of capital, strong balance sheets, consistent profitability and reasonable valuations. 

He also suggested sticking to a long-term asset allocation strategy and/or SIP mode of investing amid current market conditions. He cautioned against investing in IPOs, as he believes the timing is not favourable for such investments.

Edited excerpts from a Mint interview with Mr Krishnan: 

What would be your investment strategy for the upcoming Samvat?

We look to invest in high-quality companies with clean accounts, returns on capital greater than cost of capital for long periods, strong balance sheets, consistent profitability, and reasonable valuations, across the market cap spectrum. We firmly believe this approach is best suited for investors from a medium to long-term perspective. Quality stocks, whichever way we define them, have also lagged broader market performance, hence even if one took a contrarian view over the last 3 to 5 years, investing in quality companies at this juncture makes sense.

What is your take on the impressive number of IPOs this year? Is this the right time for investors to subscribe to them amid such high valuations?

IPO issues typically rise during the bull market phases. Irrespective of market conditions, evidence globally suggests that it is not the right time to invest in initial public offerings for several reasons. In MeritorQ, which is our quant strategy, we avoid investing in newly listed companies for the same reason.

Which sectors do you expect to perform the best this festive season?

Looking at broad valuations, there are pockets of opportunities within private banks and financial services, where you can find well-managed companies with strong fundamentals. Our investing style remains sector and theme,  agnostic though.

Will the upcoming Samvat also be a great year for the midcaps and smallcaps?

Indian smallcap and midcap indices have been among the best performers YTD (year-to-day) globally and this comes on top of smallcap and midcap indices delivering roughly over 35% annualised returns over the last four years. It is difficult for the performance to be repeated next year unless the earnings of underlying companies also grow at the same pace. Given the smallcap and midcap space in India is quite wide, with large dispersion in earnings growth and fundamentals, it is better to be picky and look at individual companies instead of generalising aggregate index valuations.

Some challenges you see in the upcoming year?

High starting valuations and cyclical earnings growth slowdown in pockets of the market are obvious concerns. FPI outflows have touched record levels this month since the Chinese fiscal stimulus announcement. Though domestic mutual fund inflows appear to have partially offset some of the impacts, the sharp correction in PSU stocks and thematic sectors like defence over the last month would suggest that there would be a lower appetite for stocks with extended valuations without supporting fundamentals.

What are your predictions for the US elections? How will it impact Indian markets?

We do not have any views on US elections. However, investors may look for risks of any protectionist measures as the US is among the largest export markets for companies in the IT and pharma sectors. If the incoming US administration further tightens trade restrictions on China, a trend that has continued over the last few years, there could be positive spillover effects for companies in these sectors.

Your advice to new investors?

Avoid being swayed by market volatility. Sticking to a long-term asset allocation strategy and/or a SIP mode of investing is particularly relevant at this stage of the market cycle.

Disclaimer: The views and recommendations made above are those of an individual analyst, and not of Mint or english.dhanamonline.com. We advise investors to check with certified experts before taking any investment decisions.

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