Most mid, small-caps still trading below fair value: Umang Papneja

Risk-on sentiment has returned, with late stage private equity and pre-IPO investment gaining traction among wealthy investors, says Umang Papneja, Senior Managing Partner and CIO, IIFL Wealth. In an interview with Ashley Coutinho, Papneja says credit funds offer a good investment opportunity over a three-year period, but one needs to dig deeper into the constituents of the portfolio before investing. Here are the edited excerpts: 

Indian equities are now trading at all-time highs. Has the market run ahead of fundamentals and are we seeing froth emerging in some parts of the market? 

The equity markets rallied sharply post the unprecedented stimulus unleashed by central banks earlier this year. The November rally was triggered by vaccine announcements while sectors related to economic recovery have played catch up. There seems to be a valid concern around a new fast spreading strain of the virus, but lower interest rates and central bank action will be strong supports to the markets. We are equal weight on mid and small caps. Although, there are few pockets showing signs of overvaluation, a vast number are still below fair value. Some catch-up is expected and we are unlikely to go underweight here in near future.

Which are the sectors you are betting on after the pandemic?

Tech, pharma and many growth stocks performed in the initial up move as investors latched on to growth candidates. Post-vaccine announcement, investors started switching to value stocks and economy-related counters (like corporate lenders, real estate, PSUs). This trend is expected to continue for some more time.

Has the risk-on sentiment returned among high net worth or wealthy investors?

Risk-on sentiment has returned and the first product category, which comes to my mind is late stage private equity and pre-IPO investments. Over last few months, HNIs have bought into established high ROE (return on equity) businesses like stock exchanges, credit bureaus and even gaming. REITs have emerged as an important class as their relatively lower co-relation to mainstream asset classes have made them an excellent diversification tool.

Are there any takers for credit risk funds, stressed asset funds, AT1 bonds and private equity at this juncture?

A couple of years ago, yields of AT1 bonds of public sector banks were in double digits. This mispricing offered a huge margin of safety. Today, most AT1 bonds have rallied to around 7% and investors have witnessed huge gains. The risk-reward here is no longer attractive as in the past. Credit funds, over a three-year investment period, offer an absolute 10% or so pickup over conventional AAA corporate bond funds. This offers a decent cushion for any accidents or possible defaults in the future. Yet, one needs to dig deeper into the constituents of the portfolio before investing. Similar is our view on stressed asset funds. Private equity has seen considerable interest particularly in late stage and pre-IPO investment.

What is the broader impact of Sebi's September circular regarding client-level segregation of advisory and distribution activities on the wealth management industry?

It is a landmark regulation and will improve transparency while bringing down overall costs. It will enable emergence of new types of players in financial space like ETFs and passive product manufacturers, fintech advisory platforms and possibly much more disruption, which we have not imagined. Clients will emerge as winners, which is most important for any industry. I can’t comment about banks but IIFL Wealth will continue operating both as a distributor and an advisor with clear client segregation.

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Business Standard