Aashish Somaiyaa, CEO, WhiteOak Capital AMC, says India's domestic economic condition is currently better than last year but external macro factors are preventing any significant upside. The market is delicately balanced, vulnerable to negative news. Investor behavior remains consistent. Net inflows decreased when the market dropped to 22,000. Confidence returned as the market reached new highs. Enthusiasm at lower levels would have been ideal.
Somaiyaa also says stock picking has become more effective recently after a period dominated by macro trends. Domestic micro factors are expected to improve, but external factors like the US economy, tariffs, and geopolitics create uncertainty and may limit potential gains.
What is your view on the market texture as we are seeing a lot of volatility contingent scenarios and uncertainties coming from the globe front? At the same time, the latest AMFI data show that the conviction of the market participants in the equity markets is still intact.
Aashish Somaiyaa: Yes, the market is a bit delicately poised because it has not been going anywhere for months. September ‘24 onwards, we have been range bound, that is where we made the last peak; a couple of months earlier, we went down below 22,000 and obviously we have just been going nowhere.
The way things are stacked up, as far as domestic economic conditions are concerned, we are doing better than probably a year back at the same time. That maybe is giving some downside protection and the external macro is preventing any upside. So, on balance, we are very delicately poised, any bad news and we run the risk of downside.
As far as flows are concerned, that habit does not seem to be changing because two-three months back when we went down to 22,000, there was a reduction in net inflows. We saw discussions about stoppage of SIPs and in June, when we started making new highs, the confidence seems to have been restored so that the basic behavioural psychology does not seem to change. It would have been great to see so much enthusiasm at 22,000, but yes, that is how things have been.
What will take the markets out of this range? Could it be global news, could it be something on the earnings front because right now there is nothing on the horizon which will generate fear or generate upside momentum?
Aashish Somaiyaa: Yes, that is why I stuck my neck out and said that there is more risk for downside because when generally we say when there is no news, it is good news but not necessarily so for the market because if there is any surprise lurking around the corner, then we are poised for risk.
As for the earnings, there has been some improved trajectory, at least what we saw on 31st March and 30th June. Obviously we are just seeing the numbers. In March there were some positives in the smallcaps and midcaps or when we look at the broader earnings rather than just the front line, because it always starts with it and then spreads out.
As we go along, maybe the earnings trajectory needs to continue. Secondly, as far as the external environment is concerned, when the trade deals are announced and if there is any positive news on that or maybe the earnings, then maybe we break out into a new area. If it continues like this, then I am afraid that eventually people will lose momentum.
With respect to the earnings, help us understand any sector you are building your hopes on at this point in time because we have seen IT major TCS disappoint and other stocks are reacting to that. Which are the other sectors that you are building your hopes on?
Aashish Somaiyaa: There are no clear sectoral bets. When the March quarter result season ended and by the time we went into May, the realisation came about that if you look at the broader performance across midcaps and smallcaps, on balance, that turned out to be the positive. This time around, if we get the trajectory to be broad, if we find a broadening in terms of the earnings, that will be the positive thing to look at, and not necessarily betting on any sector.
We generally never bet on sectors but right now I am finding our portfolios are fully focused on bottom-up and I do not find very many. If I benchmark with the BSE 500, I do not find very many stark underweights or overweights as far as our team is concerned and we generally manage portfolios which are reasonably balanced. Yes, we do have underweights and overweights. Right now, we are not actually sticking out heavily into any sector really. The portfolios are reasonably balanced. It is only the bottom-up that we are watching for and that is why I said that if what began in March continues, it will be great rather than worrying about any one sector.
If that is the game, then tell us about the benchmarks versus the broader markets. It is always a debate whether to stick with the benchmarks or shift to the broader markets. Last quarter, Nifty 50 companies grew only 3.5% while the next 450 companies grew over 20%. So, how should the market participants decide and draw their portfolios?
Aashish Somaiyaa: That is precisely what I was alluding to. If I have to name themes, the first is that the BSE 500 is what we generally benchmark with. Yes, of course, we manage a largecap fund where the top 100 is our benchmark, but by and large, whether it is Flexicap, whether it is Quality, Special Opportunities, Large and Mid, for most of our funds, the benchmark is the BSE 500. Even for our PMS AIF, BSE 500 is the index to watch.
From that perspective, where we are slightly overweight would be themes related to industrials and manufacturing. But there again, more of the midcaps and smallcaps. We are overweight on consumer discretionary. Financials in totality we may not be overweight vis-à-vis BSE 500, but the composition is very different. Apart from the banks and the usual suspects, it is more NBFCs and capital market companies. The last one where I find significant overweight is healthcare. These are the broad areas where one finds more ideas and more overweights, but yes, I hope that the breadth is what we can get.
On one side, there is good macro, REITSs, liquidity. The second side is macro which is expensive. When do you see macro deteriorating or micro becoming better?
Aashish Somaiyaa: Counterintuitively, to be honest, the last six to nine months is good for people like us because stock picking is working. Personally I found that 2023 and the first half of 2024 was difficult because it was all hot hands . – whether you are in smallcap or not, whether you are in PSUs or not, whether you are in railway, infrastructure, defence. So, either you are in or you are out. It is the macro, the top down which really determines. That is the environment we were in in 2023 and early part of 2024. The last eight-nine months have been great for stock pickers because the alpha is coming back very sharply and that is why I have been harping on the breadth and the bottom up.
Coming to your question, I feel that the case for the domestic micro continuing to improve is probably what one is watching out for and that is highly likely. But if you see the externals, the upside gets capped there because of two or three reasons. One is that we are going through a time correction. One year back, where we were on our micro and our fundamentals were not looking encouraging. Only in the last six months, has there been a change of RBI policy, a change of liquidity, and stabilisation of the rupee.
A lot of things have started working for us only in the last six months. There is a high probability of domestic conditions improving, but the external macro is completely unpredictable with the US economy, the tariffs, as well as the geopolitics. There are many hot spots in the world which are lurking to cause escalations and turbulence. I am afraid it is going to be boring for some more time, that is my sense.
Somaiyaa also says stock picking has become more effective recently after a period dominated by macro trends. Domestic micro factors are expected to improve, but external factors like the US economy, tariffs, and geopolitics create uncertainty and may limit potential gains.
What is your view on the market texture as we are seeing a lot of volatility contingent scenarios and uncertainties coming from the globe front? At the same time, the latest AMFI data show that the conviction of the market participants in the equity markets is still intact.
Aashish Somaiyaa: Yes, the market is a bit delicately poised because it has not been going anywhere for months. September ‘24 onwards, we have been range bound, that is where we made the last peak; a couple of months earlier, we went down below 22,000 and obviously we have just been going nowhere.
The way things are stacked up, as far as domestic economic conditions are concerned, we are doing better than probably a year back at the same time. That maybe is giving some downside protection and the external macro is preventing any upside. So, on balance, we are very delicately poised, any bad news and we run the risk of downside.
As far as flows are concerned, that habit does not seem to be changing because two-three months back when we went down to 22,000, there was a reduction in net inflows. We saw discussions about stoppage of SIPs and in June, when we started making new highs, the confidence seems to have been restored so that the basic behavioural psychology does not seem to change. It would have been great to see so much enthusiasm at 22,000, but yes, that is how things have been.
What will take the markets out of this range? Could it be global news, could it be something on the earnings front because right now there is nothing on the horizon which will generate fear or generate upside momentum?
Aashish Somaiyaa: Yes, that is why I stuck my neck out and said that there is more risk for downside because when generally we say when there is no news, it is good news but not necessarily so for the market because if there is any surprise lurking around the corner, then we are poised for risk.
As for the earnings, there has been some improved trajectory, at least what we saw on 31st March and 30th June. Obviously we are just seeing the numbers. In March there were some positives in the smallcaps and midcaps or when we look at the broader earnings rather than just the front line, because it always starts with it and then spreads out.
As we go along, maybe the earnings trajectory needs to continue. Secondly, as far as the external environment is concerned, when the trade deals are announced and if there is any positive news on that or maybe the earnings, then maybe we break out into a new area. If it continues like this, then I am afraid that eventually people will lose momentum.
With respect to the earnings, help us understand any sector you are building your hopes on at this point in time because we have seen IT major TCS disappoint and other stocks are reacting to that. Which are the other sectors that you are building your hopes on?
Aashish Somaiyaa: There are no clear sectoral bets. When the March quarter result season ended and by the time we went into May, the realisation came about that if you look at the broader performance across midcaps and smallcaps, on balance, that turned out to be the positive. This time around, if we get the trajectory to be broad, if we find a broadening in terms of the earnings, that will be the positive thing to look at, and not necessarily betting on any sector.
We generally never bet on sectors but right now I am finding our portfolios are fully focused on bottom-up and I do not find very many. If I benchmark with the BSE 500, I do not find very many stark underweights or overweights as far as our team is concerned and we generally manage portfolios which are reasonably balanced. Yes, we do have underweights and overweights. Right now, we are not actually sticking out heavily into any sector really. The portfolios are reasonably balanced. It is only the bottom-up that we are watching for and that is why I said that if what began in March continues, it will be great rather than worrying about any one sector.
If that is the game, then tell us about the benchmarks versus the broader markets. It is always a debate whether to stick with the benchmarks or shift to the broader markets. Last quarter, Nifty 50 companies grew only 3.5% while the next 450 companies grew over 20%. So, how should the market participants decide and draw their portfolios?
Aashish Somaiyaa: That is precisely what I was alluding to. If I have to name themes, the first is that the BSE 500 is what we generally benchmark with. Yes, of course, we manage a largecap fund where the top 100 is our benchmark, but by and large, whether it is Flexicap, whether it is Quality, Special Opportunities, Large and Mid, for most of our funds, the benchmark is the BSE 500. Even for our PMS AIF, BSE 500 is the index to watch.
From that perspective, where we are slightly overweight would be themes related to industrials and manufacturing. But there again, more of the midcaps and smallcaps. We are overweight on consumer discretionary. Financials in totality we may not be overweight vis-à-vis BSE 500, but the composition is very different. Apart from the banks and the usual suspects, it is more NBFCs and capital market companies. The last one where I find significant overweight is healthcare. These are the broad areas where one finds more ideas and more overweights, but yes, I hope that the breadth is what we can get.
On one side, there is good macro, REITSs, liquidity. The second side is macro which is expensive. When do you see macro deteriorating or micro becoming better?
Aashish Somaiyaa: Counterintuitively, to be honest, the last six to nine months is good for people like us because stock picking is working. Personally I found that 2023 and the first half of 2024 was difficult because it was all hot hands . – whether you are in smallcap or not, whether you are in PSUs or not, whether you are in railway, infrastructure, defence. So, either you are in or you are out. It is the macro, the top down which really determines. That is the environment we were in in 2023 and early part of 2024. The last eight-nine months have been great for stock pickers because the alpha is coming back very sharply and that is why I have been harping on the breadth and the bottom up.
Coming to your question, I feel that the case for the domestic micro continuing to improve is probably what one is watching out for and that is highly likely. But if you see the externals, the upside gets capped there because of two or three reasons. One is that we are going through a time correction. One year back, where we were on our micro and our fundamentals were not looking encouraging. Only in the last six months, has there been a change of RBI policy, a change of liquidity, and stabilisation of the rupee.
A lot of things have started working for us only in the last six months. There is a high probability of domestic conditions improving, but the external macro is completely unpredictable with the US economy, the tariffs, as well as the geopolitics. There are many hot spots in the world which are lurking to cause escalations and turbulence. I am afraid it is going to be boring for some more time, that is my sense.
