With the indices at an all-time high, how difficult has it become to find investment-worthy opportunities? We have been in this cycle of elevated multiples for an extremely long period. Valuations have not been cheap — the only relief in the last couple of months is the corrections that have set out in the mid- and small-cap segments. This has created opportunities. Some of the stocks have recently reached valuations we have not seen for some time. For portfolio managers, we need to use such opportunities (corrections) to find stocks with right valuations.

On Investment strategy thus far in CY18: The CIO said, strategy is to find de-levered balance sheets where valuations are comfortable. This has not significantly changed over the course of their existence. Two factors deliver compounded returns—valuations that are low and companies with growth. We need to find companies which map both these trends. Our favourite hunting ground has been businesses at cyclical lows, a process we have not altered.

On recent large cap rally in handful stocks and will mid & small cap stocks catch up: Last year, the polarisation was in the small-caps, this year the reverse has happened. Investors shouldn’t excessively heed to these short-term moves. One needs to look at businesses selectively. While smaller businesses will grow faster because of a low base, sometimes they can get expensive in the near term. That said, valuations across capitalizations have converged. At present, there are no preferences that the Fund adheres to.

On FY19 Corporate Earnings trajectory: According to Kenneth, earnings in FY19 should expand in mid-teens. As a fund positions have been added in industrials and a bit of infrastructure. We have a few businesses that we have carried forward from 2017, which are businesses with a large rural footprint.

On Infrastructure and Housing Stocks: Infrastructure is available at reasonable valuations. And we are seeing momentum in both order bookings and execution. Should this sustain, this is an opportunity. All we need to see is the sustainability of earnings over the next couple of years. Housing sector remains very fragmented and devoid of pricing power. While the scale opportunity exists, the return on equity may not meet investor expectations.

On Interest Rate Hikes: While we cannot quantify the hikes by RBI, the trend is clearly up. This does have an impact on equity valuations. As investors, we need to adjust to lower price-to-earnings (P/E) multiples. This, however, will be made up with earnings growth that has reversed.

On an early General Election: No market is ever ready for an event. We will have significant volatility closer to elections and post the results. No government can sustain a very high fiscal deficit for long periods. But as history dictates, this being an election year, government balance sheets will expand. Markets are unlikely to react negatively to the number unless this spending is carried over to next fiscal.

On Public Sector Banks (PSBs):  Although, Old Bridge Capital has not invested in this space the CIO’s view from the macro point is that PSBs are at a low of their cycle. Most of the bad news has been in the price for some time. There has always been a trade in PSBs — the question is will they come back to their prime valuations? These are not secular trades, most of these companies have ROE of under 10% across two decades. Private sector banks and NBFCs have capitalized on the weakness of PSBs. The only challenge here is we are paying a reasonable premium for these set of business.

On Consumption Theme’s promise in an inflationary scenario: Valuations are daunting in consumer stocks. But, these are secular trends and some of these stocks give a significant time correction rather than a price correction. Consumption on the whole and good companies therein have rarely underperformed markets.