Kolkata-based investor Abhishek Basumallick who is also the chief equity advisor at Intelsense Capital thinks that investors on Dalal Street should zero in for companies that can pass on input prices to customers. In an interaction with Business Today, he also shared his views on the themes which may outperform in the next 1-2 years and how investors can deploy cash amid the ongoing uncertainty in the equity market due to rising inflation and war between Russia and Ukraine. Edited excerpts.
Business Today (BT): How have rising raw material prices, especially crude oil, impacted your investment strategy for 2022?
AB: Crude is one of the most important commodities for the world and more importantly for India. We import 85 per cent of our oil requirements. Higher crude prices increase inflation and touch every industry and the common man. The government and OMCs (oil marketing companies) can decide to pass on the price increase fully which would stoke further inflation.
Already the expected headline inflation is 6.8 per cent which has gone above RBI’s tolerance limit of 6 per cent. The government can also absorb a part of the price rise by reducing taxes (excise at central and VAT at the state level).
With higher inflation, the biggest challenge will be growth. It needs to be counterbalanced by the investment by both private and public expenditure. That is what I would look out for. If it comes through, then sectors like capital goods, engineering, real estate could start picking up significantly.
BT: How directly or indirectly the war between Russia and Ukraine can affect hopes of earnings recovery of India Inc.?
AB: Realistically, there is very little direct impact unless you get your raw material from Russia or Ukraine or sell your products there. Indirectly, however, there are large impacts because we live in a connected world. Supply chains are distributed and Russia and Ukraine are large suppliers of oil and gas, wheat, metals and bulk chemicals, among others. Once these are taken out of the system, there is a high demand-supply mismatch which will take both time and major price changes to balance out. It is very difficult to predict the impact immediately but there will be an impact.
There is a second-order consequence of this as well. With this war, it is now very clear that self-reliance (Atmanirbhar) is imperative not only in defence but also in industry and agriculture. Slowly, the world will move towards more deglobalisation and thus we are sure to see heightened inflation for many years to come. Additionally, spending in India on sectors in the PLI (production linked incentives) schemes will pick up.
BT: What is your advice to investors amid the ongoing uncertainty in the domestic as well as global equity markets?
AB: It has been a time to be cautious and keep a proverbial “war-chest” ready. In our advisory, we had moved partially or fully to cash, in our different plans, because we wanted to be sure of the underlying market dynamics. The best way to invest in such times is to do discipline SIPs. Also, look for companies that have inelastic demand or which can pass on input prices to customers.
BT: What should be the right strategy to deploy cash at present?
AB: Firstly, you should have a plan of investing and that plan should align with your time horizon. It is very difficult to time the markets. One approach is not to try to time at all and keep investing incrementally systematically as one does through SIPs. But, in case you want to take market timing calls, there needs to be some systematic way of getting in and out of markets that you follow.
Now is the time to be cautious. Deploy your incremental capital only in stocks you understand and have conviction in when it reaches a level you are comfortable getting in. And never average down.
BT: Could you suggest some themes which may deliver a decent return to investors going ahead?
AB: We need to tame our expectations from the markets. Not every year will be a blockbuster like 2021. Sectors like capital goods, engineering, real estate could perform reasonably well in the next 1-2 year timeframe.
BT: FIIs have sold shares worth over Rs 1.44 lakh crore since October last year. Do you see any reversal in the trend in the near term?
AB: FIIs came into risk assets like emerging market equities when central banks in the west pumped huge amounts into the financial system. Now, that the US Fed has signalled a pause and reversal of their easy liquidity policies, money is flowing out. This should abate and subsequently reverse after a while since there aren’t too many major economies that offer stable businesses and decent return prospects.
BT: Mid-caps and small-caps have been underperforming since the start of the calendar year. What's next?
AB: This underperformance has come after a massive outperformance in the previous year, sometimes without even any earnings support for the run-up. It is just correcting itself.
BT: How to diversify equity portfolio based on large-caps, mid-caps and small-caps?
AB: You should always look to have a diversified mix of good quality businesses in your portfolio. I don’t believe in segregating stocks based on market capitalisation. There are good companies that can be found across all market caps. The focus needs to be on earnings growth potential.
BT: Can you list a few stocks which have delivered a handsome return to you in the recent past? Are you still holding them or have booked profit? How much return do you manage to get from such stocks?
AB: The last year has been good for equity investors. Most of our holdings did well. Because we run multiple strategies across timeframes, we have winners which have given great returns in a short period.
I avoid discussing specific names from a regulatory compliance standpoint and also because this analysis helps no one particularly.
BT: How did you spot big gainers? Was it based on technical analysis, fundamentals or AI?
AB: We use a combination of styles. We do pure bottom-up fundamental research for our long term portfolios. We follow a technofunda approach extensively as well for our medium-term advisory services. For quantamental approach - fundamental + technical + quant - to come up with our stock ideas. We have multiple models which suggest new ideas and we then start our analysis from there.
For our pure quant strategies, we use a basket approach to buy and sell based on pure quantitative parameters. We do not use AI, only HI-human intelligence.
Copyright©2022 Living Media India Limited. For reprint rights: Syndications Today