Time to invest in high quality and low volatility stocks, says Rupal Agarwal

Time to invest in high quality and low volatility stocks, says Rupal Agarwal

“The fears of stagflation are coming to the forefront. This is something which is on the top of investors mind and if we look at it from that perspective as well again you know it sort of indicates that one needs to be more defensive you know given where we are in the cycle,” says Rupal Agarwal , Asia Quant Strategist, AB Bernstein .

Should one chase growth or value stocks now?
When we compare value versus growth trade in India, we are more bullish towards the value part of the market. We are not expecting growth to lead the market this year but within value, we think there are parts which we expect to do well, particularly the late cycle inflation hedges. Having said that, for us the big call is to look at the defensive side of the market which can either be played through high quality stocks or even low volatility stocks.

So, for us, it is neither value nor growth. It is high quality and low volatility which we are recommending to our investors.

In the current market scenario, what according to you classifies and fits into the category of high quality and low volatility?
High quality low volatility sectors would be healthcare, staples, technology. These are some classic defensive sectors in the market but even big financial names would appear in that portfolio. We are staying away from poor quality, very deep cyclical financial names but some of the bigger banks will appear within that portfolio.

Can you elaborate a bit on that? Today is turning out to be a day of banks as well thanks to all the regulatory news that is coming in on HDFC Bank which gets out of the curb list of the RBI and Paytm which is now entering. Is it a very hot space?
Yes. Banks typically are in a sector which is a high growth and high quality sector which tends to be a less volatile sector when it comes to a market like India. India financials is very different from how we typically treat financials in the world of side investing. Generally financials is classified as a value sector which is not really the case in India and that makes the difference.

When it comes to some of the fintech of the world, we still classify that as the high growth side of the market and the best way to play the new age growth companies in our view is to look at valuations and the path to profitability as the two important yardsticks for that particular section in the market. It needs to be linked to where we are in the valuation cycle and to the fact whether that company will continue to remain loss-making for the next two to three years or whether there would be a tide change. That historically has always been two important metrics to judge the alpha opportunities within the growth segment of the market.

You have talked about cyclicals versus growth. As we are in a geopolitical crisis, commodity prices are going through the roof. Inflation – whether it is transitory or structural – remains very high. That is going to impact corporate earnings which have started to make such a strong comeback. What will be the strategy going forward as earnings are under pressure?
We have been calling for a positioning which is more suitable for an environment where growth is slowing while inflationary pressures are still building. The fears of stagflation are coming to the forefront. This is something which is on the top of investors mind and if we look at it from that perspective as well again you know it sort of indicates that one needs to be more defensive you know given where we are in the cycle.

At the same time, some inflationary beneficiaries like energy , materials sectors will still give some opportunities but incrementally, one needs to be more on the defensive side in the market. So sectors like staples, healthcare, which have not been doing well even when it comes to India, could start getting some support.

In January, a lot of the high quality pockets in the market were still seeing significant earnings downgrades and that sentiment has shifted quite dramatically in February. We saw high quality names being net upgraded versus low quality names. So, the sentiment support has clearly shifted but I would say that the investor positioning has still been low and we only start seeing that flow through […]

source Time to invest in high quality and low volatility stocks, says Rupal Agarwal

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