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PSU banks could outperform tech stocks; capitalise on short term opportunities: Sandeep Tandon

ETMarkets.com

Synopsis

“The pockets have changed and sector rotation will play a bigger role. Don’t go too long in 2022. Capitalise on short term opportunities and not take everything from a three or five year perspective. Make sure short term and medium term horizons have a large weightage in the portfolio. That is the way I believe 2022 will be.”

“Whenever there is extraordinary fear, which is the case right now, that is the time to rebuild exposure in equities. When one gets complacent, which was the case a week back, that is the time to prune it down. This is the way the whole of 2022 will be played out. Now value stocks could become your growth stock. It should be a core holding and growth stock should be your trading or tactical bet. ” says Sandeep Tandon, CIO, Quant Mutual Fund


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What are you making of the market? It does not even look like there are six trading sessions left for the Union Budget?
2022 is a very interesting year. I expect the volatility in 2022 to be much higher as compared to what happened in the second half of 2020 and the entire 2021. With this background, what is very interesting to note is that while India as an emerging market has corrected, the emerging market currencies have been very stable. Whether it is the Asian Dollar index or the MSCI Emerging market basket as a whole, it gives me a good amount of comfort because we believe the currency market gives an early indication and currencies are more sensitive and give a better perspective than the equity market.

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When we met last time in December 2020, we talked about the bottom getting placed and we saw a big rally. But now closer to 18,300 or 18,400, a good amount of complacency is there. So, we have seen a good amount of corrections. But should one be very worried about emerging markets or should be worried about India in particular? I do not think so. The problem area is the US. In the US, the vulnerability for global equities or for growth stocks is the maximum. We believe that unless the US market bottoms out, India will also not bottom off.

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If one has to look at the volatility cycle or the VIX cycle in the US, it gets close to 29 or 30 mark now. It has the potential to go back to 36-37% before the US market bottoms out and that can happen close to the Fed event or maybe one day later to that event. Post that event, volatility has to come down and this can bring back some amount of calm to the global equities.

It is a question of another three or four trading sessions where the global market should rally. I always talk about volatility as invisible and as your best friend because one has to live with this volatility in 2022. Whenever there is extraordinary fear, which is the case right now, that is the time to rebuild exposure in equities. When one gets complacent, which was the case a week back, that is the time to prune it down. This is the way the whole of 2022 will be played out.

In recent times, how have you made volatility your best friend or stay BFF with volatilities? Did you take cash off the market and what did you buy into?
The best way to play right now is to play for a smaller cycle and that is typically not the mindset for most of the retail investors or even the money managers. We typically buy from a medium to longer term perspective. When one gets into the smaller cycles, then it is not an easy decision and back of the mind, there is always a question if a right call is being taken or not. Quant as a house is always strong in the mutual fund side. We try to analyse the global environment first before getting into a strategy.

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In 2000, we talked about adaptive asset allocation and we gave a lot of environment focus on how to adapt the environment and then decide on the strategy. In 2022, since the beginning of year we are saying how it is going to be volatile. We have to prune down the expectations in the market. Globally, in September, in terms of perception analytics, growth stocks have peaked out. The perception analytics, which means the multiple of growth stocks, have peaked out so they have become market performers. We were relatively early in making that call. That is one of the reasons we launched our value fund in October because we felt that this is the best opportunity to capitalise through the value theme rather than the growth themes.

So I do not think one should be worried about the market as a whole. The pockets have changed and sector rotation will play a bigger role and one has to capitalise on the short term opportunity and cannot take everything from a longer term three or five year perspective. One has to construct a portfolio where short term and medium term horizons should also have large weightage. That is the way I believe 2022 will be.

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How should one read into this tech sell off right now – locally and globally?. Are IT stocks across the world falling under their own weight and more importantly as an investor what is the right approach now? Should one buy this decline just yet?
Let me answer this question in a different manner. The biggest challenge as an analyst or as an fund manager or as an investment community is all about what is the fair valuation multiple you want to give to these companies so called growth stories. That is where people are able to earning forecasts quite well.

But what is more important is that people are not able to quantify the valuation multiple and whether this is where the valuation multiples are peaking out or not. There is something which we do called perception analytics. The perception analytics for these growth stocks or the technology stocks was at multi decades high in September 2021.

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Since then it has started drifting down and that clearly means the valuation multiple has peaked. We are not saying that earnings have peaked out. We are not saying that price has peaked out, we are only trying to indicate that technology stocks will not be market outperformers any more. They will be at best, market performers. If we are not talking about underperformance, it becomes a market performer and one has to prune down exposure. Today the technology exposure in our portfolio for the last three months is absolutely zero. We have sold off technology stocks in September. So the perception has changed about these so called growth stocks globally and one has to keep notice of these things.

The exact phenomena was playing out in the banking and financials last year. The whole world was very gung-ho about Indian financials and technology was under owned at that stage and banks were over owned. We have seen how banks underperformed and technology over performed. I believe that if not reversed, that cycle has also peaked out.

I expect the banking and financial sectors should do better than the technology stocks despite that recent underperformance. Whenever we are seeing selloffs happening, it is in these private sector banks where we have seen a good amount of selling. I believe that public sector banks should be one area one should look at as they have a potential to outperform technology stocks also. This is a very bold statement because consensus is more towards the technology and there is a structured bull run. We are not debating on the structural bull run but everything has been priced in terms of valuations multiple and that is a point I am trying to make.
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The pre-budget rally is conspicuous by its absence. While we all await the FOMC meet, the RBI meet on 7th of February, what should be the approach of retail investors? The new age companies like Zomato, Paytm are down and these were the new loved stocks as such?
The thesis which we have been talking about for more than a quarter now is about the comeback of value themes globally. We are not talking about India. It is a global phenomenon. We have been talking about the underperformance of value stocks for more than a decade. The time has come. It is a perfect time where increased exposure toward the so-called value names as compared to growth names is a trend. It is not going to be very short lived.

In September there was a euphoria, globally liquidity was peaking out, risk appetite was peaking out. There were classic signs of euphoria. But if one dissects the euphoria between growth and value, then one realises there was a euphoria in growth stocks and not in value. So from this background, one has to build a portfolio right now which should be more towards value. Also value stocks become your growth stock. It should be a core holding and growth stock should be your trading or tactical bet. That is the phenomenon which has changed in 2022.

This thesis can last for a longer period of time than what the market anticipates.
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