"We are likely to face recessionary conditions globally before rebound in 2023"

Trideep Bhattacharya, Chief Investment Officer- Equities, Edelweiss Asset Management Limited (EAML) says that the focus of the equity funds is on the bottom-up stock picking approach. In an interview with Chirag Madia, he shares his investment approach and why he is bullish on Indian markets from a medium to long term duration.

Indian equities have been volatile for quite some time. With recession fears looming in some of the developed economies, how do you see domestic markets performing?
Before I start to talk about 2023, I would say that in 2022, we started with a hypothesis of "Tale of Two Halves" on equity markets which played out well. In the first six months of CY22, the Nifty was down by nearly 16 per cent, while in 2H22 it was up by 18 per cent.

With that background, if I were to look at 2023 and summarise the equity environment, I would probably say that we are likely to face recessionary conditions globally before rebound in 2023. In the first three to six months of CY23, we'll see the economic impact of the interest rate increases as the way that several countries have done it. We will see the impact of the same with regards to the growth rates of the companies and the growth rates of the economy. Once we tide through that somewhere around the second quarter of the calendar year, I think broadly global economies will probably bottom out and there can be a nice rebound economically.

We have seen sharp corrections in the mid-cap and small-cap space. Do you see more pain going ahead?
We remain constructive on equity markets from a medium-term perspective. We believe that the mid-cap and small-cap space offers strong wealth generation potential for investors with medium-term outlook of five to 10 years.

You manage quite a few schemes including Edelweiss Mid Cap Fund, Edelweiss Small Cap Fund, Edelweiss Flexi Cap Fund and Edelweiss Large & Mid Cap Fund. How do you allocate your time and differentiate while managing them?
We at Edelweiss Mutual Fund are bottom-up stock-pickers. As bottom-up stock-pickers, we are interested in investing in financially clean companies that can grow sustainably, have robust business models in terms of return ratios and are available to us at an acceptable price.

While this investment framework runs across all the long-only strategies that we manage, portfolio construction across different funds is dependent on specific market-capitalisation or thematic mandates that are relevant to the fund. In conclusion, while the funds are similar in terms of the investment philosophy or the process that we follow, it is reasonably differentiated with regards to the mandate of the fund.

You seem to be bullish on financials, capital goods and technology companies. Any reasons for it?
I would like to say that we are constructive on Indian equity markets from the five years point of view and bullish on a few themes which are centred around Indian growth story.

Firstly, we are quite positive on private sector investment demand. After a gap of 10-12 years, we are witnessing private sector gearing up for some capex over the next 12 to 18 months, so we are overweight on industrials and capital goods. The second area that we are overweight on is the financials and lending sector in particular. They have seen a lot of pain in the last few years like asset quality issues and the corporate deleveraging cycle, and we think that there are good times ahead for lending financials. The third area where in we would be positive is real estate, wherein we are in the first three to five years of a seven year real estate upturn. So, in this context, we are bullish on the pure real estate sector, but also on indirect plays like building materials. The fourth theme is what we call idiosyncratic country specific themes like indigenisation of defence and government growth scheme beneficiaries.

How much role does benchmark play in deciding the stock and sector level weightages in your fund?
The benchmark weight helps us in designing our risk budget. While our decision making is mostly bottom-up, from the risk management point of view we don't go beyond plus or minus 5 per cent compared to the benchmark. To give an example, if we are bullish on one sector and that sector has a weight of 30 per cent in the benchmark, we might invest between 25-35 per cent in those sectors, irrespective of the opportunity. As a fund house, we don't take active cash calls as investors have given us the money to generate the alpha and not time the market, so we don't have cash more than 5 per cent in the scheme.

Compared to large-cap stocks, mid-cap and small-cap universes have inherent challenges, and the risk of going wrong on a stock is too high. How do you navigate this space? What all factors do you look at while picking mid-cap and small-cap stocks?
Basically, we are bottom-up stock pickers, and we have an investment philosophy which guides our stock selection process. And we feel whether it's large, mid and small, as long as we follow those principles, we know we will land up in the right place. We've sort of encapsulated our investment framework into four words, which is what we call FAIR. It represents forensics, acceptable price, ESG informed and robustness. We are very interested in a financially clean company, this is the forensics part which it comes in, we are interested in companies that can grow sustainably, we are interested in robust business models that can not only grow, but grow profitably and with higher return ratios. And finally, they should be available to us at an acceptable margin of safety.

The final thing that I will point out is the acceptable price. We don't tend to get carried away just by growth or the brand name. If the margin of safety of fundamental upside is 20 per cent or lower, we don't venture into those stocks. This strategy has helped us avoid some of the higher valuation companies from time-to-time.

One of the biggest challenges is containing volatility in uncertain times, especially in mid-cap and small-cap stocks. How do you sail through the volatility?
While zeroing the stocks in the portfolio, the process remains as explained above, to protect downside risks, we have a fairly sacrosanct stop-loss mechanism. If one of our existing investments underperforms the relevant benchmark by a certain percentage over a period of the previous three months, we re-calibrate our active position so that we can take a more objective view on the same.

It's been a year now since you took charge as CIO at Edelweiss Mutual Fund. Have you made or planning to make any changes in the equity strategy, or the research team construct and approach at the fund house? And are there any portfolio changes in the works?
People change doesn't always have to mean a process or philosophy change. At Edelweiss Asset Management, we have been consistently following a robust investment process which has been delivering enduring value for our investors over many years. In the last one year, we have been diligently focusing on communicating more about our investment processes and philosophy in a much deeper way. We have also added more emphasis on forensics and ESG to the investment process.