Smart Talk with Dhimant Shah

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Dhimant Shah, Senior Fund Manager, Principal AMC
Dhimant Shah is the Senior Fund Manager at Principal Asset Management Company Pvt Ltd. Dhimant Shah has more than 20 years of experience in stock market. He currently manages the Principal Dividend Yield Fund, Principal Emerging Bluechip Fund and Principal Focused Multicap Fund. Shah is a B.Com graduate and holds an ACA. 
Dhimant Shah speaks to Geojit Insights on the markets in 2019, sectors to invest in and the funds managed by him.

According to you what will be the major factors driving the market in 2019?

The factors which impact the markets are the macroeconomic scenario, fundamentals (market earnings growth, market valuations and the direction and rate of change therein) and technical factors (fund flows, expected capital raising etc.). Their relative importance varies depending on where they stand compared to their long term averages. This year, the presence of the general elections has added an additional factor to the mix which will be important from a near term perspective. While over the long term, politics has not had a major impact on the markets, over the short term, it has the potential to cause sharp volatility.

The macro for India has been improving given the moderation in oil and commodity prices, a stable Rupee and low inflation. We do not see it as a matter of concern for most of 2019. The markets are trading in line with long term average valuations and we expect the earnings for FY20 to improve compared to FY19 given that they are concentrated in financials (esp. corporate oriented banks), IT and autos. FII inflows into EMs are likely to improve compared to the last year, but we do not think they will revert to the highs of CY17, given the level of global uncertainty. We think the markets will have a moderate year (high single digit – low double digit returns) with substantial volatility in between driven by news flow. In terms of risks, we have to watch for the risk of higher oil prices and potentially higher fiscal deficit in FY20.

In Principal Emerging Bluechip fund, you have maintained a well diversified portfolio with large number of stocks. What are the major attributes you look for while selecting a stock for your portfolio?

We prefer companies which are among the leaders in their sector, and even if they are midcaps, dominate their niche area and are run by a competent management which is mindful of capital allocation. We prefer to buy them when they are showing improving fundamentals, with earnings growth and are available at attractive relative valuations.

What is your long term outlook on pharma especially in health care as per the current valuation of the sector? (Key challenges/risk/growth in the sector).

Valuations across the sector have corrected over the last six months, but given high exposure to the US market, Indian players will have to move up the R&D curve in generics/specialty as a high US base, weaker patent expiry cycle coupled with increasing competition in commodity generics continue to pose challenges for large pharma companies. While we see industry dynamics in the US being challenging for large companies, successful investments towards complex/differentiated projects or innovative/specialty products is likely to drive the next leg of growth for Indian pharma companies. The domestic business meanwhile remains stable with structural growth trends intact.

How do you determine which asset class is good or bad value preposition, when you actively managed a portfolio by changing the asset allocation?

We do not take large cash calls in the portfolio hence this question is not very relevant in that sense.

In your overall portfolio IT sector plays a major role.  What is your outlook on IT sector, when the currency is not stable?

IT sector’s out-performance in CY18 was driven by improving demand environment in developed markets and INR depreciation. While the demand outlook looks stable as we enter CY19, the macro economic uncertainty as well as any changes in visa regulations remains the key risk for the sector. Assuming global macro to remain stable, the IT sector is likely to report similar growth in CY19 (compared to CY18) with larger IT companies benefiting from increasing share of digital business as size of the deals increase. On the other hand, post margin improvement over the last two quarters were driven by INR depreciation. The margins are likely to decline in CY19 as the companies invest in onsite capabilities. Post correction in Tier II IT stocks over the past three months, the valuations are now reasonable and closer to long-term mean. We therefore don’t expect any sharp correction in IT stocks in the near term (albeit any macro shock) due to reasonable valuations and healthy dividend yield (3-4%). However, larger IT companies could outperform Tier II vendors in near term till there is clarity on global macro.

What are the strategies that you follow to increase or decrease the exposure towards a particular stock/ sector in your portfolio?

We have stated above the kind of companies we tend to like for the portfolio. Once we identify a stock we may take a sizeable initial position and then gradually complete the targeted position keeping in mind the risk limits. We reduce positions in companies when they have reached their target price and we see no incremental positive change in fundamentals, or if there is a better alternative investment available or if the initial thesis for which we had bought the stock has proven incorrect.

What are the challenges you face as fund manager, when active funds struggle to create Alpha?

As a fund manager, you have to be sure of the thesis based on which you bought a particular stock or have a particular sector positioning. You have to be sure of your assumptions that underlie that thesis. In adverse times, you have to revisit your assumptions and see if any course correction is needed. When the markets are facing extreme volatility with downside pressures you have to be careful about stocks where the risk return equation may be unfavourable.

In the past three months you have increased your exposure towards banking sector. And the sector being the major exposure in your portfolio, what is your outlook on banking sector both private and public?

The implementation of the Insolvency and Bankruptcy Code (IBC) has changed the equation somewhat between the lenders and corporate borrowers. This is a big positive for banks. We are seeing some progress in resolution of stressed assets, slowing of aging related provisions, lower slippages and market share gain as NBFCs cede some ground. The earnings for corporate oriented banks should grow meaningfully in FY20. We like private sector corporate banks and the larger PSU banks as they don’t have challenges of growth capital.

It is observed that most of the large cap funds are struggling to beat their benchmark returns over the last one or two years. Do you think that index ETFs are more cost effective and a good alternative for this category? Please share your views.

Over the past few years the actively managed funds have beaten their respective indices though the alpha trajectory has come down which is to be expected given the bigger size of the investment industry and easier accessibility and dissemination of information. Last year (2018) was a somewhat extreme year in that most of the performance of the large cap NSE 50 index came from a select group of 8-10 stocks. Most actively managed funds didn’t have a concentrated portfolio in such names which primarily led to these large cap oriented funds underperforming the index. While index ETFs are a good product, we think that in a normal situation where index growth is more widely distributed, active funds should generate positive alpha.

How will the US – China trade war impact India in the short, medium and long run? What similar US policies can we expect in future?

In some segments of commodities (cotton, soya etc.), India may be a gainer as it may substitute some US exports to China in the near term. However, it is also possible that a prolonged impasse slows down the Chinese economy pulling down commodity prices which can be negative for Indian commodity producers but help industrial companies in improving margins. However, there is not a lot of overlap in what China and India export to the US so Indian companies won’t be big gainers there. Also, while the US-China tangle is the big issue as far as global trade is concerned, the US has been incrementally more protectionist which is not good for Indian IT companies as an example.

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