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ETMarkets Fund Manager Talk: Defence companies, ITC helped this manager’s WealthBasket clock index-beating returns in 2022

The multi-year growth prospects for the defence sector in India because of indigenisation and export potential has enticed investment management firm Rupeeting to significantly increase its exposure to the sector.

“With a 22% allocation across HAL (

), BDL (), and Data Patterns, the defence sector has been the linchpin of the portfolio,” says Sagar Lele, a WealthBasket Curator and Founder of Rupeeting. Edited excerpts:

How has your WealthBasket performed in 2022?
Our flagship WealthBasket – Monopolies – has been the best performer not only amongst our baskets, but also overall on WealthDesk. We’ve been able to clock an 18% return in 2022 in Monopolies despite it being a dismal year for the markets.

With a 22% allocation across Hindustan Aeronautics, Bharat Dynamics, and Data Patterns, the defence sector has been the linchpin of the portfolio. Further, alpha was contributed by a timely move to value through ITC, in a year marked by risk-aversion; and by a couple of fundamentally strong mid and smallcap names.
Our approach of backing the right sectors, and scouting for stocks with intrinsic tailwinds
worked wonders in 2022.

Which are the key parameters/metrics you look at while choosing stocks in your portfolio?
We follow a three-step approach for stock selection. First, we look for companies that have a robust long-term story in place. We dive deep into the business, and seek underlying factors that can lead to superior and sustained growth.

This can be because of macros, sectoral drivers, competitive forces, new products/services, turnaround stories, etc.

Second, financials have to reflect progress of the story, and validate realistically the potential of what can be. We like to see this in the form of better revenue growth, margin expansion, and return ratios; but while ensuring healthy cash flows, prudent capital allocation, and high corporate governance standards.

And lastly, we need valuations to be relatively reasonable. Potential for re-rating basis improvement in business and financials over time is ideal. A confluence of earnings growth and valuation re-rating, with large runways on both is what we are always on the prowl for.

The start to the New Year has not been good for markets. Given the volatility due to persisting global risks, how should investors approach markets?
We reckon it is time to make the most of the volatility by being opportunistic. The two pandemic years were those of a steady rise in the markets; more like ‘sit back and ride the wave’. 2022 has been a good tutor for a change in that mindset. The first half of the year was a 14% decline, and the second half was a 18% rise in the markets.
The lesson of ‘buying falls’ is what will work in 2023 as well.

India is pretty much in the same situation as last year – relatively strongest in a turbulent global backdrop. Since we already know structural factors are in India’s favour, investors can make the most of volatility that is led by global risks.

The approach we’ve been backing for investors is simple. Make a shopping list of your stocks, and look at falls as discount codes to go and buy them!

Do you foresee a capex-heavy Budget this time in view of the PLI schemes and infrastructure boost planned by the government?
We are betting on capex-aggression this time. There are several reasons for this bet: (i) as a policy decision, the infrastructure push has worked from a growth and public validation standpoint, (ii) India needs fiscal support to continue standing out on the global growth stage, (iii) tangible progress on infrastructure is a key focus for any government in the last two years of an election cycle, (iv) with inflation showing signs of having peaked, subsidy bills are likely to come down next year, providing some fiscal room, and (v) intended global supply chain reorganisation provides a strategic opportunity for policy to capitalise on.

The Union Budget may set the capex target for the next financial year at upwards of Rs 9 lakh crore, which would represent a 20% rise from the budget estimate for FY23.

In the run-up to the Budget, which are the sectors that will see most of the action? Which are the sectors you would recommend getting into? Which sectors/stocks are looking attractive to you and would want to add to your portfolio in 2023?
There are three themes which standout from a budget perspective – infrastructure, public sector and manufacturing.
The infrastructure push is likely to lead to a spike in government-led demand for the sectors of cement, construction, engineering, infrastructure, and railways.

Cement looks particularly attractive here given the potential boost in demand and easing raw material prices. We find stocks like Ambuja Cement and

particularly attractive given their presence in the north and west markets of India, which will have an additional benefit of favourable pricing dynamics.

On the public sector front, we find continued support for public sector banks led by focus on consolidation, steps towards operational improvement and strength in the credit cycle.

The defence sector has multi-year support because of indigenisation and export potential.
For manufacturing, a combination of policy support and global preference-shifts make a case for opportunities in the areas of auto components, chemicals, electrical goods, and industrial components.

Retail inflows remained buoyant in 2022, do you expect the buoyancy to sustain in this year too?
It has been very encouraging to see SIPs form a major portion of the domestic inflow. The underlying trend of retail investors buying in despite volatile and rigid market conditions gives enough reason to believe the trend will continue this year too.

However, we might see a change in the composition of incremental flows given the challenges around equity investing. After all, more than half the demat accounts at present are those that have been opened post March 2020. It’s natural for new investors to vary of going heavy on equities, after being accustomed to the steady upside of 2020 and 2021.

While we think inflow-buoyancy will continue, we might just see higher inflows in debt mutual funds and index funds compared to last year.

What kind of diversification in asset allocation would you recommend to your clients in an expected volatile market conditions?
We’ve been recommending an equal split between equity and debt for the next year, with negligible exposure to other asset classes.

Our view of continued structural upside on equities, albeit being marred by volatility makes a case for sticking on over the medium to long term. We are going gung-ho on debt because of a likely pause or reversal in monetary policy regression in 2023, coupled with higher yields compared to last year.

For other asset classes, we just don’t see risk reward adding up favourably. With inflation showing signs of peaking, commodities aren’t likely to be the best place.

A third of the world is staring into a recession and we wouldn’t bet on international equities, barring China perhaps. And real estate may just go through some crunch because of rate hikes.

(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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