investment strategy | HDFC Bank merger: Switching portfolio is the only way to generate alpha in 2022: Sandeep Tandon

“We will see growth stocks outperform in the very short term, but if I have a medium to long term perspective, I still hold value as the potential for growth outperformance and India has the potential to outperform emerging markets. who always outperform,” says Sandeep TandonCIO, Quant Mutual Fund

What does the HDFC-HDFC Bank merger mean for these two entities?
That’s great news from a larger shareholder perspective and it’s been pretty obvious for many years that we’ve been debating. Let me also highlight the challenges now. So far the market is rejoicing, the euphoria is there for this good development but as a mutual fund there is going to be a big challenge. We saw similar issues in Reliance when the weighting increased significantly. We are having trouble with the 10% limit.

Now, with the bank, another important aspect is that there is a 5% limit. It requires RBI approval and no one can own more than 10%. So this euphoria that we’re talking about, that FII ownership can be increased by 7% to 8%, but we also have to look at what impact that would have in terms of selling pressure coming from the mutual fund side or the institutional side.

There will also be an additional impact on how the weighting will decrease for other stocks. So it has its own offshoot. We have to evaluate this thing very carefully. It’s very positive, very constructive, but it poses multiple challenges as a portfolio manager and overall nobody likes to hold more than 10% in a portfolio. This is the guideline and in fact people don’t like more than 5-6% weight.

Now, with this combined entity, we have a much bigger allocation issue from a risk perspective and that’s something we need to keep in mind before we get too excited about this development.

What’s the message to the retail investor, because they think this is going to be the biggest banking entity. HDFC is up 15%, HDFC Bank is up 12% and they plan to buy it fast for fear of missing the bus.
This is how classic euphoria happens and we have seen complacency set in. This is a clear indication that the market is heading for a smaller correction or consolidation. I will definitely expect a correction as we said 2022 would be a tough year. Whenever there are signs of euphoria or complacency, prune. Whenever there is a crisis or a panic, it is time to examine it.

I won’t play it as a countercall but it gives me signs of euphoria that build into some of these names. So I’m a bit cautious. Last year, I said I wouldn’t be surprised to see Nifty reach the peak of her life in March. Now, that could happen in April. I am very constructive both in the medium and long term. I said we haven’t seen the top in Indian stocks from a multiple predictive analytics model that we run, but we have to be very careful as we are now seeing some complacency.

What would HDFC Bank and HDFC do in the short term? Also given their high weighting in Nifty Bank and even Nifty, what impact will this have on the market per se? We’re back at 18,000 now on the index having to ride out all those storms and waves we’ve been through. What is the vision of the market in the future?
This is a year where volatility will remain very high. We need to time it relatively better based on the fact that fear and greed work very well in this market. What is more important to understand is cash flow analysis. We need to regularly review the portfolio and try to see where the flow of money is increasing. That’s how you can generate a certain amount of alpha rather than just looking for a very diversified portfolio and trying not to get too excited when the market starts to rally and then trying to give up when the market starts to correct.

So the challenge for 2022 is how to keep switching portfolios or rebalancing your portfolio. This is the only way to generate alpha 2022.

We waited for banks to outperform, especially large caps. Can today change the momentum?
Certainly from a sentimental point of view, this is great news. It definitely presents in a longer term perspective financial comfort as a theme. I’ve been saying for a while that this is a theme that has the ability to outperform technology and it’s done pretty well for the past three months or so. We remain equally constructive on the financial theme, but I would also stress that it is very important to know when to reduce these exposures and the ability to rebuild exposure when the market corrects significantly. So it comes down to how well you balance your risky and at-risk environment. So we are constructive in a longer term perspective, but we have to play very tactfully.

What are some of the big changes you’ve made to your portfolio lately?
As I said, over the last three months we have completely reduced our technology inventory and added financial stocks. We started creating an exhibition in the pharmaceutical space. We continue to maintain a high exposure to metals and commodities stocks in general. We remain very constructive on the area of ​​energy and power and, if the opportunity arises, we have added some of these names.

So in an environment where inflation remains high and is by no means transitory, this is a very structural call. In this context, we believe that the commodity story will last for a long time. A theme like agricultural products is a structural story. We talked about how from 2020 to 2030, the agricultural theme and agricultural products can give returns of 100 to 1000%. You can imagine what kind of inflation we are talking about. We try to balance our portfolio so that the impact of commodities is minimal.

Everyone is very happy and celebrating the brutal correction that is happening. But I believe that crude is still in the cyclical upswing and therefore may correct perhaps closer to $90 or $92 and then back an inch. This is the phase we are in in the market and I will not be surprised to see another lifetime high for crude. I don’t rule that out even in the current fiscal year itself. We therefore need to rebalance our portfolio and maintain an orientation towards commodity stocks. We increased our exposure to the electricity or energy sector.

Quant Mutual Fund has more than $1 billion in assets under management. It has grown very smartly from around Rs 136 crore in March 2020 to almost Rs 7,600 crore right now and you talked about building the portfolio. In this time of inflation, how does Quant MF seek to protect the portfolio in terms of stock and sector allocation?
In our own VLRT framework framework, we try to balance our portfolio so that we give a one-third weighting to valuation analysis which is largely basic cash flow analysis and we also give a a one-third weight to risk appetite, which is largely sentimental, and a one-third weight to global liquidity.

When those three things come together and those three analyzes are skewed to one side, it gives me better timing and it actually helps me get better risk-adjusted returns because timing helps reduce risk profiling . It’s a myth when people say you shouldn’t time the market. Timing really helps and that’s one of the reasons we’re able to outperform the market. The majority of our systems are now trading at high lifetime NAVs, but the market is not trading closer to the all-time high. So that’s the big difference. Our framework really helps us take big calls or decide when to reduce or increase our exposure. It has been working quite well since we implemented the VLRT framework from September 2019.

On top of that, your value theme continues, but do you think growth stocks can also rebound if the market does well across the board?
Over the past 10-15 days or so, we’ve seen an uptick. After the correction in crude and commodity prices, the risk environment is back. But again, from a very short-term perspective, growth stocks may also rebound as they have also corrected a lot. We have to keep in mind that from a longer-term perspective, from an analytical perspective, growth stocks peaked in September 2021. Since then that has corrected, but I always emphasize that any movement will never be linear. .

We have seen significant underperformance of growth stocks relative to value stocks globally. This may be a corrective phase; maybe it can last about a month as long as the risk environment remains. There we will see growth stocks outperform in the very short term but if I have a medium to long term perspective I still hold value as the potential for growth outperformance and India has the potential to outperform the markets emerging markets that are still outperforming. This theme will continue and so India should also be the biggest beneficiary of the thesis we have been talking about.

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