Investors should be looking at stocks from a bottoms-up perspective and try to invest amongst the top two, three companies in any sector. That would be a much better way of investing than trying to find value, says Krishna Kumar Karwa, MD, Emkay Global Financial Services. It is a very ,very crazy market, we fall hard and we come back fast!We are in the midst of a very strong bull market and sometimes there are macro reasons to take some money off the table. So yes, there was fear about interest rates hardening globally and to some extent even locally and that was the reason for the market investors to take some money off the table which got coupled with some aggressive FPI selling and also some ETF redemption as well. Over the last two months, there have been outflows from many emerging markets but we have been beneficiaries of very strong inflows as well. There is this continuous tussle between liquidity versus valuations and sometimes the liquidity part of the segment wins but over a longer term, valuation is very important. I still believe that analysts are behind the curve. We have seen the kind of upgrades given post Q3 numbers. My take is that as long as analysts are behind the curve, we continue to remain positive and bullish. The markets have not yet discounted the future. So, sometimes we will have these bouts of selling but it is time to just stay invested in the chosen stocks and sectors. Markets move up in anticipation of good news. When the actual numbers and the earning upgrades start kicking in, wouldn’t markets stop climbing, having already moved up in anticipation of the earnings recovery?Absolutely. That is what I said. So far, the analysts are behind the curve and a lot of upgrades are still coming in. The market has not yet discounted the kind of upside potential that various stocks have and that is the reason why post the results, we have seen the markets holding out reasonably well. The day the analysts are not in a position to upgrade, it will mean that the market has already captured the upside and then we could possibly see consolidation in the short term. But sectors and stocks which have a lot of tailwinds will continue to deliver. We are in the midst of a very big bull run and investors should talk about macros. It is good to know about macro but ultimately what matters is the individual stocks that we own and how they are able to deliver or how they are impacted. Taking too much consideration of macro could be injurious to their portfolio health. So, we need to be aware of the macros but finally what matters is the fundamentals of each and every stock or sectors that we own. Is the rally in PSUs more like a deep swell or a secular bull run?As far as public sector units are concerned, there can never be a secular bull run per se because at the end of the day, the ownership structures are not totally aligned. The intention of the majority owner, which is the government, can never be in sync with what the minority shareholder requires. They have various social objectives, but currently there is much talk about strategic divestment or even otherwise and the monetisation of these assets. Obviously, there is an opportunity in some of these companies which will get privatised. We have seen the success of Hindustan Zinc since it was privatised. So, in terms of operational efficiencies and shareholder wealth creation, that is a big opportunity. Yes, we have seen a massive run up in many of the PSU stocks. They hold a lot of value. We will have to differentiate amongst the various PSU stocks and buckets. Some of them will get privatised and there would be investors who would be looking to invest in anticipation of privatisation or maybe even after that. Once the deals are concluded and where there is a lot of value, the market will be happy to look at value. There is a kind of mean reversion happening where the market is willing to give PSUs closer to fair value than what it has been giving to PSUs. Over the last three to six months or maybe even a year. they have given good returns but over a 3-5-year period, PSUs have destroyed a lot of wealth. So there is a lot of catch-up that the PSUs can do. As far as the public sector banks are concerned, there are some opportunities and tailwinds in this sector. The ability of these banks to deliver on credit growth is very important and there could be some opportunities in a few banks which are expected to be privatised in the next 12-24 months. Do you see cyclicals as a strong play going forward? Or should the portfolio be more balanced because while there has been a deeper focus on cyclicals, enough seems to be going on even in IT, pharma and the defensive plays even now?My take is that investors need to differentiate between the domestic cyclicals versus the global cyclicals and I would be very wary in terms of investing in global cyclicals, probably the metals because the factors which can impact the commodity prices and that Indian stock prices are far too many. It is very challenging for an average investor to make money. I would include banks among domestic cyclicals. As the GDP rebounds and is expected to be very strong in the next few years, domestic cyclicals will continue to offer opportunities. Whether it is banks or auto companies or even the cement companies — all offer good opportunities for investors. Coming back to constructing the portfolio, it is better to have a reasonably balanced portfolio. In terms of defensives, we continue to remain bullish on the IT sector looking at the tailwinds that the sector is enjoying and the visibility that many of these companies have for the next two-three-four years. Balance sheets and convergence of profits is very high for IT companies. We would continue to see bouts of consolidation where some of these sectors or stocks would possibly be moving sideways and may be some corrections. But it makes sense to have a balanced portfolio approach. Investors in any bull market need to be very cognisant of the kind of stocks that are in the portfolio in terms of management capabilities and long term track record. The temptation to weaken a portfolio to earn higher returns should be very much kept under control. Secondly, it is very tempting for investors in a bull market to buy into three-year, five-year and seven-year stories which may not deliver or a lot of which could be back ended. Investors in euphoria tend to invest in those kinds of companies and end up disappointed. These are the two things that one should be careful of. Use the bull market to lighten stocks which are basically weak as the market is giving you an opportunity to exit. So have a balanced portfolio and ensure that the quality of the portfolio does not weaken. The domestic growth story is intact and looking strong and India has been looking like a preferred play within the EM basket. But what happens if there are jitters on the global front?There is no reason for flows to be as robust as they have been and there can be periods where there could be some outflows. We should be prepared for that. I do not think we can expect a straight line of inflows. Already as interest rates have hardened overseas, we have seen some kind of outflows already and even now, we are probably seeing tempering of the momentum which was there in January-February. We should be prepared for these kinds of jitters or outflows. But from a domestic investor’s perspective, so far the domestic mutual funds have seen reasonably aggressive amounts of outflows. In the next few months, that should even out and become neutral or hopefully positive. So why look only at global flows? That is one part. If domestic institutional flows turn neutral, that is a good positive and if it turns positive, then it is always better. Flows can drive markets up to a point. Ultimately, it is all about the valuations and the growth that the company delivers. In the longer run, valuations and growth outperform the short-term flows or outflows.Where do you still find valuation comfort in the market?For many of the banks, the valuations are still very reasonable for growth opportunities that many of these banks offer. Some of the auto companies have shown a massive turnaround in terms of their sales etc, be it the commercial vehicle segment or even the local passenger vehicle segment and their overseas business. That is one segment where there is a lot of comfort as far as valuations are concerned. Then there is a tractor major which has announced a lot of restructuring as far as capital allocation is concerned and I think that is an opportunity that is still available. No doubt, we have seen a decent amount of an uptick in the real estate developers but from a medium term perspective that is one segment where there is still a lot of value for investors. They are coming out of maybe a seven, eight-year kind of a cycle and they have just seen in the last six months of improvement but from a next two, three-year perspective, that segment should deliver reasonably good amounts of returns. I would still say that from more than a sectoral perspective, investors should be looking at stocks from a bottoms up perspective and try to invest amongst the top two, three companies in any sector. That would be a much better way of investing than trying to find value. And there is a lot of momentum in PSUs and there is a lot of value there even now. I am not a great advocate of investing in them from a three or five-year perspective; but for a short term perspective, there could be some opportunities to invest in some of these public sector units also and not only from a strategic disinvestment perspective but the sheer value that many of these companies offer. Is it better to play the entire auto rebound via ancillaries or should one invest in PVs and CVs which are showing momentum?One can have a balanced approach — invest in the OEMs and alsi in a few of the ancillaries. These ancillaries are not only catering to the domestic market, but they are global in nature in terms of their export potential. So even from a PLI perspective, there could be a massive opportunity in many of these ancillaries which have a lot of global presence and the ability to manufacture and export. From a portfolio perspective, having direct OEM exposure plus a few of these ancillaries could work out and the breadth of the opportunity as far as ancillaries are concerned and many of them the size and scale that they have achieved is phenomenal.