Aarati Krishnan

Ankur Maheshwari, CEO of Equirus Private Wealth Management, takes a few questions over email on recent developments that have been roiling markets.

What explains the sharp divide between the performance of index stocks and those of mid- and small-caps, in this market fall?

We have witnessed a steep correction and relative underperformance of mid- and small-caps relative to large-caps. For 2018 year-to-date, the BSE mid- and small-cap indices have underperformed the BSE Sensex by approximately 22 and 29 percentage points. However, the recent underperformance of mid- and small-caps should also be evaluated on the basis of their relative outperformance in 2017 when they outperformed the Sensex by approximately 20 and 30 percentage points, respectively.

Given the 2017 market rally, mid- and small-cap valuations were already at historic highs. Recent negative macro-economic headlines, particularly on crude oil prices and rupee depreciation, have resulted in a flight to safety to large-caps. There are different sets of investors owning large- and mid-cap stocks. Foreign portfolio investors and investors with low and moderate risk profile prefer large-cap stocks. Mid- and small-cap investing is usually preferred by high-conviction investors having an aggressive profile.

Domestic mutual funds have seen a massive expansion in their assets in the last five years and they typically favour mid- and small-cap stocks. So has this meant better liquidity in the stocks beyond the top 250? During the recent market fall, there were complaints of liquidity drying up again in small-cap names.

In the five years ending this September, domestic MFs’ assets have increased by approximately 2.8x. This unprecedented expansion has increased liquidity across various categories of stocks. But foreign portfolio investors and large domestic mutual fund schemes are biased towards large- and mid-caps. In a bull market, liquidity is relatively always higher than in the bear market phase. Complaints of liquidity drying up for small-cap names are part of the bearish phase and we expect liquidity to become better, if markets were to recover.

As a wealth manager, did you advise your investors to be in cash or to book profits before this fall started, as market valuations were quite high?

We advised investors to adopt a cautious approach and recommended profit-booking when the Sensex was close to 38,000 level. This was primarily driven out of the expensive valuations and some global headwinds emanating from trade wars, etc. We believe investors should always be guided by a fixed asset allocation strategy, irrespective of market conditions.

Is this a good time for investors who are sitting on cash to buy stocks? Should they do it gradually? Where do you see pockets of opportunity?

Yes, it is an opportune time for investors to evaluate increasing their equity exposure if the current allocation is less than the desired exposure. We suggest retail investors to adopt a staggered approach (say, spread over next 12 months) towards this. Investors should focus on individual companies rather than sectors or categories of stocks. The recent market correction has thrown up such opportunity in many good quality companies.

What’s your take on the recent turmoil in NBFC stocks? Is the market panicking needlessly?

Rumours about NBFC stocks were based on market concerns about asset-liability mismatch at IL&FS and DHFL. IL&FS defaulted on their inter-corporate deposits and commercial paper and subsequently for DHFL there were liquidity concerns with its securities trading at high yields. These concerns and rumours in particular had a contagion effect across the entire NBFC sector. The market is concerned about the liquidity scenario in NBFCs.

Today, bond markets offer very good returns too for long-term investors. Given a choice, should one choose debt or equity right now?

We believe one should not chase returns in any asset class. Portfolio allocation across debt, equity and other asset classes should be based more on risk profile and financial goals. But on debt, given that we are currently in the midst of a structurally rising interest rate regime, we believe investors should prefer low-duration and ultra-short-term bonds. However, for investors who are averse to intermittent volatility and prefer locking in yields, we recommend investing in fixed maturity plans.