Home / Mutual Funds / This mutual fund has given 40% return in 6 months by betting on cyclicals

A top-performing Indian money manager is betting big on cyclical stocks that he sees benefiting from economic reopening and the government’s $1.4 trillion-plan to boost infrastructure.

“For the last few years, government’s focus has been towards building and bettering urban infrastructure, creating better connectivity between cities and states and more recently on renewable energy," Rohit Singhania, co-head for equities at DSP Investment Managers Pvt, said in an interview. “We are looking at companies which benefit from these and also who are focused on digitization and automation."

Companies involved in building materials, engineering services, construction and electrical components have been rallying as Prime Minister Narendra Modi’s government makes a big push for infrastructure to help the economy recover from the impact of the coronavirus pandemic. The trend is in contrast to what is being seen in developed markets like the U.S., which is witnessing a rotation out of the economy-sensitive cyclicals amid concerns over recovery in growth from virus flareups.

“A dedicated focus on building new cities, ports, high-speed rail and highways will have a multiplier effect on the economy," Gaurav Patankar and Nitin Chanduka, strategist with Bloomberg Intelligence, wrote in a note. Stocks from the road, materials and industrial sectors remain key beneficiaries of higher spending.

BSE metal and industrials indices outperformed Sensex
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BSE metal and industrials indices outperformed Sensex

For Singhania, who oversees $2.4 billion of assets, the bets have already paid off well. His India T.I.G.E.R fund, which has investments in companies ranging from a small-cap maker of industrial electricity transformers to UltraTech Cement Ltd., Asia’s second-most valuable cement manufacturer, has delivered nearly 42% returns year to date, beating 96% of its peers.

“For companies in infra and manufacturing sectors, most of the costs like salaries, depreciation and interest are fixed, as their capacity utilization starts to go up, you have a high operational and financial leverage benefit," he said. The fund is also investing in makers of durable consumer goods, wire and cable manufacturers, gas utilities and paint companies, which all stand to benefit from a revival in the property sector.

Earnings Recovery

DSP Investment expects the Reserve Bank of India to keep interest rates down at least until the end of the year, and markets to remain resilient so long as demand holds up and and corporate profitability improves. The asset manager expects companies to positively surprise on earnings as economic activity gradually picks up amid a ramp up in vaccinations and falling mortality rates. He sees risks remaining from a rise in oil prices and geopolitical tensions with India’s neighbors.

Of the 25 NSE Nifty 50 companies that have announced results so far, 18 have missed earnings estimates. Still, that hasn’t stopped the key index from extending its gain this year to 13% to be one of the top performers in Asia. It has some of the steepest valuations among major markets worldwide.

“Valuation multiples look a little stretched today, but we are not factoring in the best of recovery in earnings. We are being fair in valuation based on what we see now, but when the cycle turns, we could see much higher growth in the space," he said.

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