The Economic Times: Midcap Stocks are On Sale; Time for Good Picks: Joel Werner

The Economic Times: Midcap Stocks are On Sale; Time for Good Picks: Joel Werner

The Economic Times: Midcap Stocks are On Sale; Time for Good Picks: Joel Werner 150 150 SOLITUDE CAPITAL MANAGEMENT

By Sanam Mirchandani, originally published on The Economic Times

Indian markets will be driven by participation from domestic institutional investors going ahead given that there is significant room to grow for domestic participation into equities, said Joel Werner, chief investment officer at Solitude Capital Management, an Asia-focused investment firm based in Hong Kong. In an interview with Sanam Mirchandani on the sidelines of Motilal Oswal’s Annual Global Investor Conference last week, Werner said he would consider increasing bets in India even though the benchmarks are at record highs.

Edited excerpts:

Indian markets have held up this year and are at record highs but other emerging markets are down. Do you think India’s equity market will be able to maintain its status as the best performing market this year?

The Sensex and Nifty have certainly rallied terrifically. In US dollars they are still obviously weak with the rupee being weak but they are the strongest of the Asian markets. What has been going in India’s favour is really a still obviously weak with the rupee being weak but they are the strongest of the Asian markets. What has been going in India’s favour is really a slowdown in the increase in oil price. Also, we are in a world where the United States is not fighting with India. Globally, we are seeing an environment of riskon and risk-off.

Indian markets will be driven by domestic participation. We need to see domestic participation either through home owners or people’s participation in the stock market, or indirectly through pension funds and other pool of vehicles. That number in India is extremely low, in single digits. In the United States, it is approaching 100%. In Japan and Taiwan, it is in the 60% and 70% range. This shows that there is incredible room to grow.

Traditionally Indians had saved through bank deposits or gold or in the property markets which have been challenged. Demonetisation and the fight against black money have challenged the valuations and then people lost money in real estate. People are going to have to look for a way to channel their wealth and savings into the domestic market.

Which markets are you most bullish on within Asia and where does India stand?

It (India) is a top allocation for us. About 40% of our net asset value is in India currently and that is high; it has been a little bit higher. We primarily look at India and China. Those are the two largest addressable markets and two of the largest consumer markets. We invest typically 40% of our capital in India and 40% in China. We have some investments in Southeast Asia.

Would you consider increasing your bets in India at this juncture?

The answer is ‘yes’ because even though Sensex and Nifty are at all time highs, I would have to look at the list of those indices just to make sure I am not carving anything out.

We would probably not invest in any of those companies. We look for companies that are typically around $500 million in market cap to $5 billion in market cap when we first underwrite that investment.

Those are typically not in the Nifty and the Sensex. Also, the Nifty and the Sensex tend to include heavy weighting towards banks, property companies, oil and gas and power. We don’t do any of that stuff. We are primarily focused on consumer staples, consumer discretionary, industrials as they pertain to internal consumer growth.

When markets are high there is always something that is not doing well and there is always something that is either out of favour. Our investors have one-third annual liquidity so we have partnered with our limited partners and our investors in the fund such that they know we are investing over a multi-year horizon and if there is a major correction that is often the best time for us to invest.

What’s the biggest risk to markets at this juncture?

With the world trade discussions going on, we are seeing a lot of strong talk which is leading to the slowing of the global GDP and which has tremendous amount of knock-on effects. The biggest risk right now is basically the geopolitical risks. What is different this time is that the politicians in the leadership seats are not looking to resolve things quickly whereas previously over the last, say, even just 10 years, people would be pragmatic and would work together.

The mid- and small-cap companies in India have seen a sharp fall this year. Do you think the worst is over?

It has sold off hard. We have taken some pain on that in our investments. It’s hard to call a bottom of anything. What I would say is that we have seen a great rotation. We will see maybe another great rotation back when people feel more comfortable. We love the sell-off in the mid-cap space. It’s great for us. We can end up taking companies that have either outperformed or perhaps not as good. The stocks have gone on sale. With a lot of these companies it could be that their underlying earnings power has decreased or it could actually just be a situation that because of illiquidity, their multiple is compressed.