Talking about the themes, I think capex consumer discretionary and China Plus One is that the theme for your Midcap Fund that you are trying to follow and how would you like to decode this theme in terms of returns for the investors?
I would actually point to five themes of which in the midcap, two of these themes actually lend to midcap as a segment quite well. Let us start with those two, I would say that indigenisation of defence is one theme that I have been positive on and have been sort of playing this theme through the Midcap Fund overall. Given the paucity of listed names, particularly in the large cap arena, mid and small cap as a segment lends itself quite well to this theme overall. I think it is a 10-year theme of which we are probably somewhere in the first two to three years standpoint. The second, as you pointed out China Plus One and if I were to combine with government initiatives, I would say the EMS space is the other theme which we are quite positive on.
We think that again from five to 10-year perspective, there is a meaningful runway ahead of us and companies are just about getting listed. And hence, it kind of augments quite well for the midcap segment. We have meaningful bets in them, but these are the two themes of the five which lends themselves very well to the midcap segment and we are overweight on these two. Apart from these two, of course, there are the other three which are basically the capex theme which you talked about, the rise of private sector capex.
The lending financials, we think that is a good place to be from a couple of years standpoint with lending financials overall. And third, real estate; we think that the real estate as a segment is probably in the first two to three years of five to seven-year upcycle. So in total, this fund is bullish on five themes overall of which two lends itself actually particularly well to the midcap segment.
Based on these themes, the sector in focus from what we can see is banks, industrial products, finance, healthcare and electrical equipment. The exposure in these top five sectors are how high as compared to the benchmark?
Basically, the majority of the portfolio is oriented around these five themes. If you were to kind of look at it, I would probably say somewhere around 70% to 85% of the portfolio is oriented around these five themes that we talked about overall. We think that as a combination of valuations and earnings growth, these five themes present a very good opportunity from a wealth creation standpoint.
Are valuations really high in the midcap space or you think that we will see a little more run up now for a few more quarters? What is your analysis?
My sense is that overall, if you were to look at midcap as a segment, by and large, the segment has not gone anywhere from a one and a half year perspective, one and a half, two year perspective like the market.
But at the same time, particularly in the midcap space, if you look at the earnings growth of the companies, they
hold anywhere between 20 to 35% if not more. So the valuations today is a lot more palatable than they were about a year or so ago, is the first point that I would make.
Second, in my opinion, some of the drivers that we talked about in the form of these five themes that we kind of discussed, are medium term themes and are earnings drivers. So as the economy takes shape over the next three, five years, these themes play out and these earnings drivers play out, India would be in a cyclical upturn. So the best way to play the cyclical upturn in any economy is to basically play in the mid and small cap segment.
And that is why we have been recommending the midcap fund over a period of time or particularly of late, as we see that we are getting closer to the cyclical upturn than earlier. So to answer your question, yes, valuations today are reasonable as compared to a year or so ago. We still do not think there is irrational exuberance in the market. And we think that earnings estimates are actually still surprising on the positive which makes us feel that it is still, the segment is still good to invest.
Are you sitting on high cash levels? What is the current status on that?
We do not take a cash call at Edelweiss Mutual Fund but even if I were to, I would not be kind of high on cash because we think that overall the earnings momentum remains fairly strong, fairly broad based. And in such conditions, when I can deploy money profitably across a market cap segment, why hold the money in cash? So we are not sitting on cash overall. We are almost 97 to 98% deployed, as we speak.
How do you see the trajectory of midcap space changing in terms of sectors?Few bets where you might want to decrease your exposure going ahead, or you just want to wait and watch right now and just stick to the current strategy that has been adopted?
Great question. So I would say that incrementally speaking, if I were to regress my memory for what we have done over the last three-four quarters, I would say we were meaningfully underweight IT, IT services in our portfolio about three or four quarters ago.
As we speak, we are neutral. So overall, clearly there, we have incrementally added, we have put some money to work. We have also historically been very negative on the consumer side, we still continue to be underweight consumer but our underweight has come down to a certain extent. And the other, the final bit that I would mention is pharma, we were kind of in a state where it is.
So net-net our portfolio positioning is oriented around overweight manufacturing, underweight consumption, overweight domestic cyclicals or domestic sectors, underweight global oriented sectors. By and large, that positioning is not changing. The only thing that has changed over the last three or four quarters is probably kind of on IT services where we were meaningfully underweight, we are probably now more neutral in nature, not yet overweight, but mostly neutral in nature.
