INSUBCONTINENT EXCLUSIVE:
The recent risk aversion in the credit space and the sell-off in the mid- small-cap space have thrown up some interesting opportunities
We believe it is a good time to start looking at some allocations in the beaten-down spaces of credit, mid-caps and small-caps while gaining
large-cap exposure through structured products.
When it comes to investing in equity markets, the signal turns green when the price paid
justifies the value received
Mid- and smallcaps are slowly entering that sweet spot where they are available at compelling valuations
While the overall mid- and small-cap valuations are still not very cheap and hover around one standard deviation above mean, the recent
steep correction has opened pockets of opportunity in several companies
When we look at the 101st company to the 500th one, we observe that 30 per cent of these companies are trading below trailing P/E of 15
This percentage was as low as 12 per cent on 31st January 2018, indicating that a larger number of companies in the space are now available
Additionally, the ratio of price to book of Midcap vs Nifty has also shifted towards the mean and is far away from the excesses that it was
Our in-house proprietary market-cap allocation model suggests that investors should consider allocating 20 per cent and 10 per cent of their
investment portfolio to midcaps and small caps, respectively
They should start allocating monies to portfolio managers who are good stock pickers with a nimble corpus
This will allow them the flexibility to create a fresh portfolio based on the current opportunities and generate alpha.
Increasing coverage
of large-cap stocks, decreasing market inefficiencies and the higher expense ratio of mutual funds are making it challenging for large-cap
fund managers to generate alpha
Last year we saw passive strategies gain traction as investors allocated more and more money to such investments
We believe that the core allocation to large-cap stocks should be done through passive strategies like large cap ETFs and
principal-protected structured products, which can provide participation on the upside and capital protection on the downside with low
These products can be structured in such a way that they can capture the upside potential of Nifty and protect the downside by ensuring
capital protection at the end of the tenure through investments in AAA rated issuers backed by strong promoters.
Over the last six months,
heightened volatility in the fixed income markets has had a strong impact on the type and quantum of fixed income allocations
A host of credit events led to a liquidity crunch and a subsequent widening of spreads
However, this extreme risk aversion has created an opportunity to invest in the markets with extremely good risk-reward ratio
Today, a lot of companies as well as promoters, are offering higher yields with stronger covenants and securities
These structured deals are available in the private credit space since mutual funds and NBFCs are not participating actively in this space
These transactions are 400-500 bps above what they were six months ago
We believe that it is a good time for investors to start allocating some money to well-structured credit funds and also standalone deals as
managers can negotiate for a higher yield with strong collaterals and securities in place.
(Author is senior managing partner of IIFL Wealth
