How are you reading the markets, from a valuation perspective? Are premium valuations justifiable?

Siddharth Vora: Post a strong 2023, we continue to maintain a positive bias towards equities while accounting for higher volatility for risk assets including Indian equities into 2024.

Our optimism is supported by improving monetary dynamics driven by rate cut expectations, and our caution arises from global geopolitical risks, higher valuations and uncertain global macros.

Within this broader landscape, while Indian equities do reflect steeper valuations, they continue to be supported by robust domestic macros and fundamentals.

Despite indications of elevated valuations based on various fundamental and technical metrics, historical trends suggest that premium valuations and euphoric sentiment in markets can persist for 3-6 months on an average before normalizing.

As of now, more than 60% of stocks in India are trading above 1 standard deviation of their historical averages based on our proprietary indicator, plotted above for Nifty 500 stocks that incorporates multiple valuation metrics to give a broad market cycle gauge.

The rationale behind these premium valuations lies in India’s status as the fastest-growing global economy, boasting stable macros, relatively lower geopolitical risks, robust domestic investments from the private sector and government alike coupled with international capital flows into our economy and markets.

Within 6 months of launch, your AQUA Strategy has done stupendously well. Can you take us through the performance and also the strategy that helped generate alpha returns?
Siddharth Vora: Within the first six months of its launch, the AQUA Strategy has demonstrated exceptional performance, notably driven by its strategic allocation within pro-cyclical sectors such as infrastructure, defense, realty, auto, industrials, and diversified financials.

For 2023, our benchmark agnostic approach helped us stay out of large index weights, including RIL, private banks, IT and chemicals, which significantly aided Aqua’s outperformance.

In the current cycle Aqua has employed a unique value-momentum style tilt, with relatively higher exposure to mid-small caps.

In terms of key themes, Aqua has been able to capture the rally of the broad public sector undertaking (PSU), diversified financials, industrials, realty, auto, infrastructure and defence.

Thanks to the strong rally, we saw several multibaggers in 2023. Were you lucky to find some of them in your portfolio?
Siddharth Vora: Stocks such as BSE, Kalyan Jewellers, and REC Ltd were part of the portfolio where each stock returned over 150% last year. BSE led the pack with 289% returns and was part of Aqua’s portfolio for a majority of this rally.

Some notable stocks are Cochin Shipyard, PFC, Mazagon Dock, Ircon International, and Welspun Corp, where they gained more than 100% each.

Will it be difficult to find multibaggers this year assuming volatility is likely to remain high?
Siddharth Vora: Multibaggers refers to stocks that rise multifold by capturing re-rating in valuation multiples and improvement in the rate of earnings growth signified more simply by a rise in P/E ratio and EPS.

Typically, this occurs in under-owned, undervalued, smaller-sized, and undiscovered stocks.

However, it’s noteworthy that there has already been a robust rally in small and mid-caps, backed by substantial retail inflows in small and midcap funds and direct equity exposure by retail participants, making the valuations in these segments frothy.

Hence, we prefer to adopt an approach that focuses on the total portfolio instead of solely seeking out multi-baggers in isolation.

In the current year, we advocate for a shift in focus toward managing risk, protecting profits and emphasizing a more modest expectation in terms of returns.

The priority lies in adopting a cautious approach and directing attention towards strategies that safeguard against potential downturns rather than singularly chasing multi-bagger opportunities.

With interest rates expected to trend downwards this year, which sectors could drive investment opportunities?
Siddharth Vora: Domestic economy pro-cyclical sectors: They are expected to thrive with overall economic expansion. These sectors, including manufacturing, discretionary consumption, real estate, infrastructure and industrials, tend to perform well during economic upturns. As interest rates trend downwards, businesses within pro-cyclical sectors are likely to benefit from increased demand and positive market sentiment.

Discretionary Consumption: The urban segment is poised to outpace rural areas in discretionary consumption, driven by several factors. A lower cost of borrowing encourages consumer spending, while rising per capita income, a growing number of women in the workforce, and a youthful working population, improving employment and education levels further contribute to increased demand for discretionary goods and services.

Infrastructure: The government’s continued focus on infrastructure development projects, including transportation, energy, and telecommunications, is expected to drive growth in this sector. Increased investment in infrastructure can have positive spillover effects on the broader economy.

Energy: The energy sector is set to thrive with various growth drivers. India’s Agri-service and growing manufacturing orders present lucrative opportunities, both domestically and for exports. The sector’s positive outlook is further reinforced by increasing power demand and the ongoing shift towards renewable energy sources.

Healthcare: Healthcare remains an attractive option for investors due to its resilience, sound valuations, and improving growth outlook. The sector’s defensive nature makes it a favorable choice in the portfolio as the bull market progresses and volatility could stay elevated, particularly during macro uncertainties.

Financial Services: The financial services sector is poised for growth with multiple factors contributing to its positive outlook. Increasing savings and credit expansion, financialization of savings, a growing high net worth individual (HNI) base and expanding capital markets present ample opportunities.

Tourism: The tourism sector is expected to see increased momentum with the government actively promoting Indian tourism for local and global tourists. As interest rates trend downwards, discretionary consumption on travel should get a boost. The growth potential is further enhanced by the increased connectivity of more cities within India through both rail and air travel.

Which themes in India could see a pick in the momentum assuming that the incumbent government gets a third term?
Siddharth Vora: Defence – It offers 3 growth levers comprising import substitution, export opportunities and domestic growth via upgrades of existing defense infra and advancements in new defense technology. The government’s Make in India push in the defense sector is expected to facilitate significant growth, introducing new military technologies and sophisticated defense systems.

Infrastructure: Building on the historical trend of substantial investments in infrastructure, there is a strong indication that the government will persist in this trajectory in 2024. Notably, Prime Minister Modi’s federal housing scheme and initiatives aimed at improving road, rail, ports and airport infrastructure are anticipated to drive further development in the sector, contributing to economic growth.

Railways: The focus on high-speed corridors, bullet trains, and Public-Private Collaboration is poised to remain integral to the government’s railway infrastructure projects. Furthermore, initiatives to enhance stations and increase connectivity between cities will persist, incorporating advanced technologies to modernize the rail network.

PSU: Engineering and infrastructure-focused Public Sector Undertaking (PSU) companies, along with PSU lenders, are expected to flourish as the government continues its significant investments in infrastructure, energy, and other developmental projects. The commitment to bolstering PSU performance aligns with the broader economic development agenda.

Renewables and Energy Transition: The government’s clear commitment to clean energy and the increased share of renewables in the energy production landscape bodes well for companies involved in renewables, spanning technology, generation, Engineering, Procurement, and Construction (EPC). This strategic focus positions the sector for growth amid the global energy transition.

Travel & Hospitality: With the government emphasizing the promotion of domestic tourism, including religious & medical tourism, stocks within the hotels, airline and allied travel ancillaries are poised for structural growth. Improved air connectivity, emerging new destinations, and changing consumer preferences amidst rising discretionary spending on travel related experiences bode well for this sector in the medium to long term.

Import Substitution: Sectors and industries benefiting from Production-Linked Incentive (PLI) schemes to encourage localization and create domestic supply chains are anticipated to sustain positive performance. Examples include Electronic Manufacturing Services (EMS), Auto Ancillary, Semiconductor manufacturing, and Solar modules, reflecting the government’s commitment to reducing dependence on imports and fostering self-sufficiency.

2024 is going to be event-heavy for domestic markets. How can AQUA strategy help ride the volatility and generate alpha returns?
Siddharth Vora: In the dynamic and eventful environment anticipated for domestic markets in 2024, AQUA’s adaptive quant processes, designed for systematic, unbiased, agile and disciplined responses to the changing market landscape will enable us to navigate volatility, while staying focused on alpha generation.

Aqua’s model divides risk into the 2 key categories- Systemic risk & Portfolio Risk. Systemic Risk comprises asset class exposure and beta exposure, and we deal with this by dynamically allocating across large, mid, smallcaps and cash coupled with adjusting portfolios beta from high to low based on risk signals.

Portfolio risk comprises sector risk, style risk, and security risk which we deal with using sector rotation, style alignment, regular portfolio rebalance and robust liquidity and fundamental filters to eliminate stocks with red flags.

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

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