The muted private consumption is a concern for a growing economy like India, says Kislay Upadhyay, founder and smallcase manager of Fidelfolio Investments.

In a conversation with Benzinga India, Upadhyay pointed out the mute private consumption as one of the reasons for the softer Q1 results this time.

Muted Q1 Performance, Despite Markets At All-Time High

“The aggregate revenue growth of around 3,500 companies has been at 9-10%,” he said. Upadhyay also pointed out that It's normal for markets to be at all-time highs. As gross domestic growth, corporate revenues and earnings continue to grow, market highs are simply a natural outcome.

"As per government data, private consumption growth has happened at only 4% from 2023 to 2024. This is the lowest in the last 12 years except the 2021 pandemic year. This is something of a concern for a country like us with 7-8% real GDP growth expectation and 11-12% nominal GDP growth rate", he added.

Upadhyay also pointed out that markets being at an all-time high is now a norm rather than an aberration with the growth in GDP, corporate revenue and profit. He advises investors to stick to solid investment rules and objective frameworks to manage risk rather than worrying about macroeconomic factors that investors have no control over.

While the fund manager flagged concern about the consumption number, the latest Q1 data shows a recovery in numbers as private consumption grew to a 2-year high of 7.4% in Q1. However, the GDP growth fell to 6.8%, a 15-month low.

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Risk Management

"We manage risk in our portfolio by having a very objective framework or using investment rules that have been back-tested over the last 25 years. So, we know these rules work well across cycles. So, using such objective investment rules and frameworks to decide on the stock selection and minimizing the subjectivity in calls is the way we eliminate risks in our portfolio."

He pointed out that his flagship strategy minimizes risks by holding companies that have high earning visibility and free cash flow that is they operate with higher capital efficiency.

Fidelfolio's Shivalik Compounder smallcase has a compound annual growth rate of 28.04%, while Great Himalayan Compounder had a CAGR of 13.26% since its inception, according to data from Smallcase.

Other basic hygiene risk mitigation practices include sector, industry, stock diversification, not trying to time the market and having a longer investment horizon or low portfolio turnover are other best investing practices that mitigate risks, Upadhyay mentioned.

The fund manager also added that quality companies with clean management that take care of minority shareholders are also important in risk management.

Coffee Can Investment

Upadhyay also worked on the book "Coffee Can Investing: The Low-Risk Road" by Saurabh Mukherjea. Recently, value-based cyclical companies have performed better than quality stocks. While he says that is a fact, he points out that over the long term, earnings and free cash flows determine the share price growth rather than market sentiments and entry valuations.

He adds that while the coffee-can investing style works over the long term, investing in value companies with high order books requires different skills, such as predicting order books before the market and entering and exiting the stock at the right valuations.

"We find that the timing element is the most difficult to attain consistently and that is why we usually see the long-term return of quality stocks being better than cyclical," he added.

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