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How to outperform the market with a limited risk profile? Sandeep Tandon answers

In this extraordinary euphoric phase, prune down your holding and look for stock ideas in the value space where you will get opportunity and some of the energy stocks can look very compelling from the current levels, says Sandeep Tandon, CIO, Quant Mutual Fund.

What are you telling your clients now? Moves like this and a scenario like this has not been seen before where interest rates are low and liquidity is extreme?

Let me rephrase this from a different perspective. You are talking about the scenario, the sort of move we have not seen before. Actually, in the last 40 years or so, we have seen this sort of scenario four times. It happened in 1984, 1992, 2000 and 2008 and now in 2020. I am talking about the background; we saw extreme pessimism which was reflected in extreme risk appetite. The risk appetite got significantly low and then the liquidity came back. This was the phenomenon which happened in March 2020 where the risk appetite indicator globally was at lifetime low and the liquidity indicator at lifetime which high led to a massive bull run. It is a lethal combination.

In the Indian market, risk appetite on a relative basis is still on the higher side. Liquidity is still on the higher side compared to the Chinese market where liquidity is shrinking, risk appetite is also shrinking. So India will outperform China in a big way but keeping the larger perspective in mind, Asia risk appetite is on the lower side as compared to developed markets, particularly US.

So with a lag effect, money will shift to Asia and India in particular. We remain very constructive from India’s point of view because both risk appetite and liquidity, the combination of which is a factor for the market’s up move is very constructive. But we also have to look at the euphoria in the global market. If we try to dissect this euphoria in terms of various components, then we realise that we have seen extraordinary euphoria in growth stocks.

We believe globally, growth stocks are in the fag end of peaking out in terms of valuation multiples. We are not talking about growth stocks peaking out in terms of price itself. They have the potential to move up but their outperformance journey which we have seen for the last many years can halt right now and this is the time to revamp your portfolio and look at the beaten down, neglected territories that we call value stocks.

Yesterday also, the beaten down names in banking, energy space or the realty space bounced back, If one can restructure his portfoliomore towards value stocks as compared to growth, one will get better risk adjusted return even at 18,000 levels.

Is it a good strategy to raise cash because if this bull market is on rather than trying to time the market, shouldn’t one prepare the portfolio for a 15-20% volatility and a 15% downside risk rather than worrying when is it going to fall?
We do not have a very aggressive view in terms of raising a very sizable amount. 5% to 10% is always good to have for any big opportunity which you see in the market because I do expect that from a risk appetite point of view in the Indian market. I do not talk about the complacency level in developed markets like the US. The Quant complacency indicator is at four decades’ low, which indicates that US markets are more vulnerable. If anything goes wrong, you will see a ruboff effect out there.

This is the time to look at the neglected territories for high dividend yield value stocks. Some of them have started playing out. The laggards have started performing. This phenomena is very different due to the extraordinary liquidity in the system. I will prefer to play value names and quality but I am not talking about buying everything in general.

Themes to look at are real estate, capital goods, textile.There are many opportunities there. Some of the growth stocks have become value stocks now. Those are the areas one can assess and try to increase the weightage towards these names in the portfolio rather than raising significant cash and worry about whether we will get the exact top or not.

Markets are rotating beautifully. Typical old economy deep value stocks like NTPC and Coal India are making a comeback. Is the rotation here to stay?
We have a very large thesis that from 2018 till 2023, as per our predictive analytics model, we believe the market will remain very choppy and volatile. We call it the volatility expansion phase and the best way of playing out volatility expansion is not to buy and hold from a longer term perspective. Within this strategy, one has to do a good amount of rotation. So if one can churn the portfolio from time to time to take advantage of the market, you will make more money and you will be able to outperform the market much better and with limited risk profile.

So we are not talking about extraordinary risk in the market. In this extraordinary euphoric phase, prune down your holding and look for stock ideas in the value space where you will get opportunity and some of the energy stocks can look very compelling from the current levels.

What are you making of the laggards making a comeback. These vary from smaller ones like RBL Bank or a Yes Bank to bigger boys like ITC.
This is a time to definitely look at these names but I will still go for a quality instead of buying just any beaten down name. We have had some issues in the past. I will prefer to buy stocks in energy, capital good space, particularly since we see infrastructure spending increasing in this country. Since the market is at 18,000, nothing is cheap at these levels. But if I have to look at the relative valuations, then these are the pockets which will give phenomenal opportunity.

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