Bet on 3 sectors generating value in this volatility, be wary in 2 sectors: Nilesh Shetty

Time of India

15 hours ago

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, Portfolio Manager,says tariff uncertainties create chances for long-term stock investments. Logistics and pharma sectors are becoming attractive. Private sector banks, asset management, insurance, and broking firms remain key allocations. IT services and consumer discretionary stocks offer reasonable valuations for the coming years. Investors are closely watching these sectors for potential gains. The focus is on strategic stock selection amidst market fluctuations.Shetty further says that for years, consumer staples traded at high P/E ratios, underperforming post-2022 due to valuation gaps, though defensive buying has spurred recent recovery. Capital goods experienced a boom in the last three years, but current valuations appear unsustainable as earnings normalize. Investors should exercise caution in these sectors where valuations deviate significantly from long-term averages.Yes, the uncertainty around tariffs has given an opportunity for stock pickers to pick up stocks that they want to pick up for the long term. Again, the assumption is that a lot of this uncertainty will fade in a few months. We are seeing opportunities coming up in logistics where we are getting closer to a level where we want to buy. Some pharma stocks are getting interesting for us. We continue to have a large allocation to private sector banks as well as stocks linked to the savings side of the household balance sheet including asset management companies, insurance companies, as well as broking companies.So, the valuations remain fairly okay for us where we continue to have allocation and also, we have large allocation in IT services and consumer discretionary stocks where at least for the next few years, valuations look reasonable.: Yes, in certain sectors, there has been a disconnect for many years now. We saw that in consumer staples. These stocks were trading at a very high price to earnings ratio for the better part of last decade. Post 2022, they have been underperforming because there was a big gap between the valuations that they were getting and the earnings that they were delivering. Recently, we saw some recovery in these stocks because investors wanted to have some defensive names in their portfolio. But otherwise, they still remain very, very expensive. We see that in capital goods as well. In the last three years, there has been a boom in these stocks.Again, the assumption is these valuations are not sustainable. As earnings normalise for these companies, suddenly you realise why are you paying 70 times, 80 times to these sectors. So again, our sense is that investors need to be careful in these two pockets where valuations look not in line with their long-term averages.We have always favoured private sector banks. Sporadically, public sector banks tend to do well especially in times where NPA cycle remains very benign; but that is not the norm for these public sector banks. The norm is they continue to have much higher NPAs than private sector peers and which catches up with them. So, trying to value these companies when the NPA cycle is very low, is not the correct thing to do. You may want to normalise that and bring it back to long-term averages. Then suddenly the valuation does not look that attractive for public sector banks.Private sector banks, of course, are far more efficient. They continue to price credit a lot better than public sector banks. At least our allocation has been favouring private sector banks and within that, quality private sector banks. We are not allocated that much to tier II private sector banks where we again because of this aggression in growth and trying to grow books they tend to sometimes rival public sector banks in non-performing assets.In the consumption space, you have to be careful because the festive season is slightly earlier than last year, and so the near-term numbers may show a spike in sort of demand and other things versus last year, but that is not sustainable because as the base shifts and last year because festive season was later. Suddenly you realise those numbers are not sustainable and you correct them. But over the medium-term, we continue to have large allocation to two-wheeler companies where we think valuations remain reasonable.We have trimmed a lot of them, but we continue to have a decent allocation there. We continue to have an allocation to a large tractor conglomerate where we think they are doing very well in the passenger vehicle space including some of their new launches, but these are the places where we are allocated to.In IT services companies, we think long-term opportunities remain fairly bright. It is in the near term because of this uncertainty in terms of what is happening in the US which remains a major market for them. Even for their customers to commit large capex is not easy and you have seen a deferral of discretionary IT spends which has delayed a recovery in their numbers. But looking at where valuations stand relative to their sort of 5-year, 10-year averages, they remain very attractive right now. So, we continue to have a large allocation but you may need to be patient as an investor there. You may have to see a couple of quarters of more pain till things settle down in the US.Current cash levels are around 12%. Cash is a residual for us. If we do not find names where we can deploy capital and we are happy with the existing weights in the portfolio of the stocks that we own, what remains is cash. But again, if tomorrow we were to find opportunities where we think valuations are attractive and the company meets our liquidity and governance norms, we are happy to add. It is slightly above the long-term average. Our long-term average has been about 10%. It is currently about 12%. But like I said in this correction, there are a few names which are getting closer to the buy limits that we have for these stocks. And you may see those cash levels come down.No, it is just individual stock specific because we are a stock picker portfolio, the portfolio that we build. It is just that we have not found individual names that we cover in our research database of 200 companies coming below our buy limit at the moment. So, because we do not find opportunities to deploy, what remains is cash. But if tomorrow three stocks were to come below our buy limit in this correction we will aggressively buy into those names and suddenly you will see cash levels come down.We are probably contrarian to the market view right now. We have a large allocation to quality private sector banks. We think valuations for that particular data set right now are far below their long-term averages. While for the PSU banks we think the valuations are above their long-term averages and for the quality of the banks that they are, perhaps you should be careful giving those valuations to these banks.The private sector high quality banks have been time-tested with proven management quality over the last multiple cycles. In the case of PSU banks, in every cycle, they tend to do very badly probably because of mispricing of risk which I do not think has changed materially. So, our allocation primarily tilts towards private sector banks. We have one PSU bank which is the largest in the space in our portfolio where we think pricing of risk is slightly better than other PSU banks.In terms of strategy, we are market cap agnostic. We will go where we think valuations are attractive as long as the company meets our liquidity and governance norms. But like I said, in the rally that has unfolded in the last five years especially after Covid, the small and midcap valuations have been very high and to get names which make sense at valuations that we are comfortable with has not been easy. We have a very low allocation to that space right now. In the process of trying to boost your returns and trying to allocate to this space, you may destroy a lot of returns because you are overpaying for some of these stocks.This stock traditionally has been run by managements which are not of great quality and especially when liquidity dries up, the correction in share price can be very sharp. If you are trying to take an exit at that point in time, you might see significant losses to a portfolio. We have always been very careful of the valuations that we want to pay for businesses and right now across this space getting businesses that make sense in terms of valuations is not easy.