The financial sector is the only sector in the market where currently the valuations are fair, said Abhishek Singh, Fund Manager at DSP Mutual Fund.

Singh who manages the DSP Top 100 Fund told Benzinga India the financial sector is poised to do well in the next three to five years. The fund manager also said that he is unsure about IT due to the high valuations and uncertainties around generative AI.

Here are the edited excerpts from the interview:

What do you think about the markets as Q2 results kick off and the recent volatility in the market?

We have seen some cuts in Nifty EPS (earnings per share) in the previews itself. When the sell side was making previews, Nifty EPS was cut by 2%. The valuations across the board seem a little stretched. We might get into a phase where we see some time or price correction. Investors should not be surprised if markets are weak in the near term.

How do you generate alpha in the Top 100 fund?

The benchmark is the NSE 100, and the fund owns 22 out of those 100 stocks and there are 10 stocks (in the fund) that are not part of the benchmark. In the last few years, we have done well. But one, two or even three years is noise as far as Equity is concerned. My advice to investors is to think in terms of more than five years at least and decades if possible.

In the fund, we don't shy away from taking significant active calls. We build exposure in segments where we feel the downsides are limited. One ends up taking exposure in sectors where there is a lot of pessimism and future expectations of profitability and growth are muted. Here, you get the most positive surprises, and it also negates the need to forecast the future very accurately.

Your fund has a larger holding of financial stocks than the category and a smaller holding in IT. What is the thought process behind it?

At this point in time, financials is the only sector where the valuations are cheap or fair when you compare it to history or compared to built-in growth expectations. Financials also provide diversified exposure with public and private sector banks, NBFCs, capital markets, and insurance. A large exposure in the fund is towards banks.

Banks are a proxy for consumption and capital expenditure in the economy. I think the banking space would do well in the next three to five years. It's hard to predict what they would do in the near term and we try not to focus on that too much.

We are underweight in IT because these stocks are trading at significant premiums to their long-term history when their market shares are also high. Their growth rates are also coming down compared to history as global spending on IT services is coming down. We also don't know how gen AI would impact them. It could go either way.

Global Capacity Centres (GCC) are also taking shares from IT companies and are also increasing the talent cost. So the odds are not in their favour despite them being great companies.

Some people also buy IT because they think IT is a defensive play. But If you look at historical corrections, particularly when the market fall is driven by global factors, IT is not exactly defensive.

See Also: Always On Lookout For Synergetic Acquisitions, See Strong Growth Potential In Insurance Segment, Says BLS E-Services’ COO

Are the return expectations from the power sector low right now because of higher valuations or is there still room for growth due to its long-term nature?

We bought power stocks at cheap valuations because it was a long-term theme. At this point, they might grow at 7-9%. If we get better opportunities, we will switch from power or any other sector in the portfolio. But at this point in time, power deserves some allocation and that is reflected in the portfolio.

With monthly SIP contributions and markets at an all-time high, do you think the expectations of higher performance from here are difficult?

Retail investors adopting the SIP (systematic investment plan) route is a good thing. Is it putting pressure on fund managers to deploy the money? No. The supply side has caught up with the IPOs, FPOs, promoter selling and private equity exits.

I don't agree with the argument that mutual fund flows are taking the valuations higher. There could be a temporary supply-demand mismatch. But in the long term, it does not matter. At this point, we are also sitting at elevated multiples compared to the historical average.

So, investors should not expect the same returns they have made in the last 5 years in the next 5. However, they will do fine while looking at a 10-year, 15-year time frame.

Promoters have increasingly sold stakes through block deals while domestic institutional investors have bought the shares. Is it a sign that markets are getting matured?

A lot of these promoters have spent decades building these businesses and they would want to cash in on that at some point. Obviously, they would try to monetise that during a bull market.

Promoter holding in Indian companies is close to 50% which is the highest across mature markets. It's not a bad thing that they are selling at the margin. However, I'm uncomfortable about the fact that some of the MNCs (multinational companies) that do not need the capital and who plan to be in India for the long term are paring down their stakes. It is a valuation call.

How do you view these public sector stocks that have risen a lot in the last year and now have slightly corrected in the last quarter? Is the valuation reasonable now?

A lot of valuations in the public sector space are still high. However, valuations in public sector banks and financials are somewhat reasonable. There are probably not many lucrative opportunities in the public sector spaces at this time. But this is true for the private sector as well.

Read Next: Bet On Healthcare, Power Sector For Value Creation, Says MarketsMojo Group CEO