As domestic equity markets continue to rally, now for six-weeks straight, volatility is also making a comeback. Amidst the rising volatility, Vikaas M Sachdeva, CEO, Emkay Investment Managers Ltd, says that the odds are in favour of quality stocks. In an interview with Kshitij Bhargava of Financial Express Online, the market veteran shares his thoughts on the banking and finance stocks. He shares his outlook for the foreign inflows that deserted Indian equities in March this year, while also decoding the current trend in the mutual fund industry. Here are the edited excerpts.

First, it was debt mutual funds that saw heavy redemption and now we are seeing inflows drop in equity mutual funds, how do you look at it?

These two events are uncorrelated. Debt MFs do see quarter-end AUM swings – last quarter has been somewhat similar. As far as equity funds go, the key metric is the SIP flow which is still in the vicinity of around $ 1.1 billion odd per month. The last quarter has seen a confluence of unique factors which have moved money to direct stock trading and PMS strategies. One is the amount of time people have had to study their portfolios as well as the markets. Second has been the convenience with which one has been able to open retail broking accounts and trade. Third has been a significant uptick in the indices last quarter. Hence, the “DIY” investor has moved from direct MF plans to direct retail broking. Savvier investors with advisors have shown an affinity to know more about high-quality PMS strategies like ours. Hence, one should look at a holistic perspective on capital market flows rather than just viewing it from an MF data lens.

Your large-cap based Emkay 12 strategy has outperformed Nifty, can you shed some light on the investment strategy?

Emkay’s 12 has a unique “Smart Alpha” framework which looks at mitigating the Selection bias and allocation bias vulnerabilities of a fund management process. From a universe of the Nifty 100 stocks, intense rigour and discipline are applied to come at a portfolio of 12 high-quality stocks to take care of the “selection bias”. More often than not, it is a concentrated portfolio like this which drives the Nifty forward. In turn, the “allocation bias” is taken care of by assigning equal weights to these stocks and re-balancing them annually. This ensures that there is no undue concentration risk over a period of time, thereby ensuring more consistent returns. Interestingly, a recent independent study of Emkay’s 12 strategy v/s the best large-cap MF schemes in the country has shown some very encouraging results. I see savvier investors increasingly asking for a strategy like this going forward.

Emkay 12 has a 30% weightage assigned to BFSI, but the outlook according to many, for the sector is grim in the light of the pandemic, do you see it differently?

We are currently underweight in the BFSI sector. Credit costs are likely to remain high through the financial year 2021 given the extension of moratorium (by another 3 months) and the COVID-induced uncertainties. We are monitoring this sector closely and will make appropriate adjustments as clearer trends start to emerge

With the recent rally in equity markets are there any sectors that you see as viable investment options?

One of the things that people need to realise is that the 52-week high of Nifty does not mean a 52-week high for stocks. In an index, some stocks take it forward at a point in time and some don’t at that moment. So there are always investment opportunities but investors need to look at the long-term and if you do that then there are several opportunities. There are tectonic shifts taking place and some of them can be seen in stocks. Telecom, healthcare, speciality chemicals, and even contract manufacturing are great sectors. If you are still unsure, then make investments in a staggered manner. If you are mutual investors there is the SIP. What we have done at our end is that we have launched a “10/10”. Here, we take 10% of your money across 10 weeks. We take your money and park it into a liquid strategy and every Thursday we put in redemption. When the money comes, on Friday we invest it into the equity strategy.

What are your expectations from FPIs now, when do you see them coming back and investing in Indian equity markets?

FPI flows happen due to a confluence of a variety of factors. Liquidity, regulation, currency and opportunity in other competing markets are some of them.

Short term trends notwithstanding, I expect all of these factors to play in India’s favour going forward. India is currently the only market in the free world which can not only give a huge domestic consumption base to global companies setting up base in India, but is also walking the talk in terms of improving on the “ease of doing business”.

I see momentum shifting decisively over the next few quarters towards an increase in FII appetite for India

Stock markets are up and gaining momentum but there’s volatility as well, what are your expectations for the next few quarters? 

While there is a general acceptance that the markets should accept the financial year 2021 as an aberration and look at price-earnings from the financial year 2022 onwards. Liquidity in the system would react sharply to the news flows coming in, in the interim. We continue to believe in quality stocks weathering the storm better and coming out stronger over the next few quarters. To add sense to this sensibility, we believe that the opportunities presented by such volatility will be best capitalized through our unique “10/10 Systematic Transfer Plan” route we offer to our clients