For a bubble to be present, markets must rise way beyond earnings and that is not the case today, says Ashish Somaiyaa, CEO, WhiteOak Capital AMC. From the impact of elections to his take on the active vs passive debate, here are edited excerpts from the conversation :


Per a recent analysis by bl.portfolio, while the bellwethers have been touching all-time highs, participation of individual stocks has been limited, across market-caps. Would you say that the upswing in the last year or so has not been broad based and that stock selection has mattered?

Right from the time in February/March when talks that mid- and small-caps have gone up a lot started surfacing, the market has become a little bit more discerning, showing a tilt towards quality and good governance. So, stock picking has mattered in recent times. But before that, if we broadly see FY24, everything which is cyclical, including commodity, energy, power, railway, defence, PSUs and in general, the small-cap space, was just going up unilaterally.


Do you see a bubble in the mid- and small-cap space, or the market in general?

At any point in time, if you look closely enough, there will be a bubble in some part of the market and there will be massive undervaluation in some other part. But leaving those generalisations aside, consider this. The last time we had a sustained phase of double-digit nominal GDP growth was probably during 2003-08. It is only after FY21, you find nominal GDP growth coming to double digits or closer to that, again. Little wonder then that you are seeing some amount of broad-based excitement in the market. But for a bubble to be present, markets must go way beyond earnings. On the other hand, if you take five-year data of growth in Nifty vs growth in EPS of Nifty, or even the Nifty 500 data, it is not the case.


Does the rally in defence, PSUs, real estate and autos have more legs? Or do you see a sector rotation happening?

Sector rotation will have to happen based on relative valuations. Just take an example (not a recommendation). On a five-year basis (as of April 30), CAGR of the private sector bank index was about 8 per cent, but five-year CAGR of PSU bank index was 21 per cent. As against this, when you take the long-period average like the 15-year average, you will find exactly the reverse — private sector bank index, after having five bad years, has still grown at 19 per cent compounded; and for the PSU bank index, after having five good years, the 15-year CAGR is still about 11 per cent. So that tells you that you know what the long-range sustenance is and what people expect. That’s why I say market is like a pendulum. It will always tend to swing to extremes. There were points in time when people used to think they will never be able to buy a stock like HDFC Bank. And now people are saying it is trading well below its long-period averages, but they still don’t want to touch it. Everyone wants to jump into a running train. Nobody wants to get into a train, which is stationed in the platform.


Do you expect broad themes such as manufacturing to continue to drive markets, irrespective of the outcome of the elections?

Market has had its ups and downs irrespective of the dispensation. In 2004, the market hit lower circuit because NDA lost. But, in 2009 the market was in upper circuit because UPA had won a second term. In 2014, the market was up because NDA came to power. So, the market has behaved both ways. My learning is that if the economic situation is good, market wants continuity. If the economy is stuttering, the market wants change. Right now, perceivably, we are in an upswing, so market might be hoping for continuity. If there is a discontinuity, there could be a correction and the investment-led sectors could get impacted, while you roll back into defensives and ‘quality’ stocks. And then, after a particular period of consolidation, the market would reassess if there is policy continuity, what’s changing and what’s not. But ultimately, in the long trajectory, one has seen that the correlation (for markets) is only with economic performance and not necessarily with any dispensation. 


What is your reading of the Q4 results and what is your expectation for FY25?

I think the traction has been good. If you go 9-12 months back, it was all about commodities and cyclicals. In recent quarters, there is traction in financials. Of course, there could be some raw materials pressures from commodities going up, into FY25. However, if you take oil for instance, while it is not cheap, it has not shown a big spike. Plus, when there is an election, some lag effect plays out, which also results in significant amount of spending and consumption or at least flow of money in the system, post the election. Right now, the headwinds are obviously from the external environment and that does not seem to be changing anytime soon. But domestic-centred sectors have things going for them. Net-net, the 15-18 per cent earnings growth that is generally being anticipated for FY25 looks achievable.


Most of the newer fund houses have been actively launching passive funds. But at WhiteOak, your launches so far have been on the active side only. Is it a conscious strategy?

I’m a believer that there is a scope for co-existence. However, at WhiteOak, our competencies are geared towards researching a very wide array of stocks. We have 32 analysts covering 700-plus companies. Secondly, it is a well-known fact that inefficiencies and potential for outperformance is more in the micro-/small-/mid-cap segments and we derive strengths for identifying the gaps from the legacy of our founder, who has a long track record of managing money in India. So, our prime focus here is to beat the benchmark and that’s why we are offering active products.

Secondly, a lot of discourse in India about active and passive is informed by what happened in the US. You will be surprised to know that in the last 25 years in the US, the market cap has gone up three-four times, but the number of listed companies have reduced. In the US, institutions put a lot of their money in private markets. So, over a long period, the alpha has moved from the public market to the private market. How else do you explain the reduction in the number of listed companies. How else do you explain this whole cult of pre-IPO, crossover, VC and PE investing ? And in the last 25-30 years in the US, the corpus of buyout funds has gone from $500 million to nearly $2 trillion-plus.

While in India, more and more companies are getting listed. So, I think that there is still scope in India for people like us to do a lot of work on smaller companies and make the effort to outperform. However, as far as clients and intermediaries are concerned, I think they should be driven by their risk-return preferences and what works for them. We are in the quest for what we think we can achieve. If we outperform, people will back us.

Ashish has over 20 years of experience in business strategy and management, sales and distribution, product development and marketing of investment offerings. Prior to WhiteOak Capital, Ashish served for nearly eight years as Managing Director and CEO of Motilal Oswal AMC. Ashish was also the head of sales and distribution at ICICI Prudential AMC