“Public sector enterprises (PSEs) have performed well in this market rally, there could be some froth in that space, further a lot of SME stocks are also skyrocketing, and therefore a caution is advised in that space as well,” says Rakesh Pujara, Founder and Managing Partner at Compounding Wealth Advisors LLP.

In an interview with ETMarkets, Pujara said: “The beauty of bubble is to ride it and one must have some rule-based framework to get a timely exit from the hope trade,” Edited excerpts:

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Q) Nifty50 witnessed some volatility post-Budget, but it has managed to hold on to crucial support levels. What is your take on markets in February?

A) Markets are in a strong bull grip; however, some blue chips and pivotals are lagging behind smallcaps & midcaps, and Bank Nifty is showing weakness, particularly in private banks whereas PSU banks are scaling new highs.

So, this market is a stock pickers paradise, and sector rotations are very active. IT index has joined the bandwagon and is within striking distance of its all-time highs.

Q) Now that the Budget is over, are there any events (global or domestic) that can disrupt market momentum?

A) None of the markets whether global or local are showing any sign of weakness & this being election year in India & US markets are unlikely to give up gains and momentum.Many events like geo-political disturbances are shrugged off. Coming back to India, markets generally rally up to elections and post-elections, the market forms a formidable top or bottom.So, until May 2024, when election results are likely, we do not expect the market to correct significantly unless some event that nobody anticipated is unveiled.

Q) Please take us through your smallcase fund performance in 2023.

A) It has been a stupendous year for our Smallcase portfolio’s, our top performances are as below:

o CWA Everest 10: 103.93% up for 11 Months

o CWA All Caps 35: 95:27% up for 11 Months

o CWA Milt 25: 87.27% up for 11 Months

o CWA Multi-cap Momentum Gladiators: 72.12% up for 11 Months

Readers can check out all our portfolio performance on real real-time basis on cwa.smallcase.com

Q) Two small cases have almost doubled investors’ wealth in 11 months – CWA Everest 10 and CWA ALL Caps. Take us through the process of stock selection.

A) Our CWA Everest 10 is up 103.93%, which tracks NSE500, is up 39% from 22nd March 2023 i.e. the date of our smallcase portfolio launch.

This portfolio has generated 64% alpha in 11 months. In this portfolio we typically buy concentrated positions in stocks scaling lifetime high.

Our strict rules w.r.t entries and exit enable us to ride winners, cut our losers and generate significant amount of alpha v/s its benchmark. We restrict our exposure to 10 stocks, and we keep checking for rebalance every week, if any.

Our CWA All Caps 35 is up 95.27% and is benchmarked against NSE Total market Index which is up during the similar period by 40.62%, generating a whopping 54.65% alpha.

In this portfolio, we buy up to 35 stocks which are showing great trend and momentum. All our entry exit rules in this smallcase are based on price action, trend & momentum concepts. A complete rule-based approach helps us sleep peacefully at night.

Q) How to manage risk in the fund?

A) So basically, since the entire framework is based on rules, we do not recommend timing the markets, instead we recommend remaining invested in the portfolios through thick and thin.

However, since markets are at an all-time high, we recommend people to stagger their investments by investing 30-35% upfront, and the balance in the next 3-4 months to minimize the volatility while entering the fund.

However, one has to stay invested and take some pain of non-performance to realise the true potential of the product.

At the investor level, they should manage risk by allocating funds across smallcases and across different asset classes as well so that the volatility of equity which is very high can be smoothened.

Q) Voices are growing louder about valuation in Nifty and in small & midcaps. What are your views – how should one play the broader markets?

A) While pockets of markets may look a bit stretched in terms of valuation, historically Indian markets have always traded at a premium compared to its peers, sheerly because of the presence of some high PE sectors like FMCG, Pharma, IT etc.

Given the growth trajectory of the Indian Economy & GDP, market is discounting the future in advance and keeping itself at elevated levels.

Valuation must be considered at the stock-specific level instead of taking a call on the market. We play the broader market purely via price action, trend, momentum & many other such approaches.

After all, the market is a discounting machine, and if one has to follow a single indicator in the market it should be the “PRICE”.

Q) Any sectors that are looking overheated?

A) Public Sector Enterprises has performed well in this market rally, there could be some froth in that space, further a lot of SME stocks are also skyrocketing, and therefore a caution is advised in that space as well.

However, the beauty of a bubble is to ride it and one must have some rule-based framework to get a timely exit from the hope trade.

Q) What queries are you getting from your clients, especially those who want to put in fresh money?

A) Most of the clients are optimistic about the future of India but at the same time are a little bit cautious since markets are trading at an all-time high.

There is some sort of FOMO existing in the minds of investors. Most of them are seeking guidance on how to enter the market without being hit by a sudden drop.

While there are no fixed answers to this, as we suggested earlier, one can stagger purchases and ride the upcoming decade or two of the upcoming bull market.

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

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