George Thomas on 3 pillars of Quantum investment strategy; expects IT to outperform a few quarters down

George Thomas, Fund Manager, Quantum AMC, is optimistic about the banking sector, favouring private banks due to potential upside and anticipated credit growth. Quantum AMC has significant investments in banks like State Bank of India and Kotak Mahindra Bank. The firm is valuation-sensitive and leans towards large-cap stocks. Liquidity and governance standards are also crucial for them. According to Thomas, consumer discretionary stocks, especially two-wheelers and durables, show potential. Investors should be forward-looking. The AMC holds significant positions in financials and IT, expecting IT to outperform as Gen AI adoption scales.Quantum AMC has big exposure in banks including State Bank of India and Kotak Mahindra Bank. What is your view on the banking sector and should one still invest there?
George Thomas: From a banks’ perspective, with the interest rate cuts, we would see some moderation in net interest margins in the near term which the Street is aware of and has already factored in. When we look at the credit cost environment, the NPA cycles continue to be benign in the broader segment and therefore we are quite optimistic. From a valuation perspective, banks make sense but we prefer private sector banks where we feel the upside is slightly on a higher side. Our sense is even credit growth can pick up from where we are as the economy gains momentum.

While investing in the market, the style and strategy to a large extent decides whether one should go with the largecaps, the blue chips or have the broader market midcap and smallcap scrips in their portfolio. Should one just go with the domestic theme or more global themes like the IT space? What are the core investment philosophies that you consider?
George Thomas: We are quite sensitive to valuations in general and so we are slightly largecap tilted at this point. But even our smallcap fund is quite cognisant of valuations and therefore, in a volatile environment or when the market perceives risk and when the high valuation stocks take a beating, we tend to stand out.

The second important pillar for us is the very clear focus on liquidity. We give lots of focus on average daily trading volume and that varies from strategy to strategy. What helps is when the risk is more pronounced in the market or when the liquidity gets scarce in certain pockets, our set of stocks stand out.

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The third most important pillar is our focus on governance standards and quality of stocks and that ensures that our holdings stay in good stead for the longer term. If you have investments in poorly-governed companies or where the governance standards are weaker, then investors might get shocks at some point in time.

So, these are some of the key tenets of investments that we follow

From a sectoral perspective, our largest weight is in financials, which is a mix of banks and some of the savings related themes like insurance and asset management companies and we have a sizable weight even in the IT sector. Historically, when there is a transition happening like the current phase where we are seeing a lot of adoption of Gen AI and stuff, in the initial phase, the Indian IT companies may not fare well because a lot of their exposure is in terms of implementation and integration with the existing software environments. So, as the adoption gains scale, which we expect to happen in a few quarters from now, the IT sector should start outperforming to a large extent. But from a valuation perspective, the largecap IT bucket looks reasonable at this point.

What is your view on consumption stocks? With the festive season starting next week, how should investors prepare for that? Should they wait for the final outcome on GST or is this the right time to invest?
George Thomas: We have a reasonable exposure towards consumer discretionary which is a mix of two-wheelers and a consumer durable name. In some of those names, there is a decent amount of potential in terms of volume revival. If you look at the recent numbers, the volumes have been slightly on a weaker side, but as and when the government measures get into the sector and the implementation happens, that could provide an added impetus to the volume growth.

But even with a reasonably normalised volume growth assumption, some of the two-wheeler and durable names which you can see in some of our portfolios, those have decent upside at this point in time. But the point is investors should always be forward looking and not wait for the event to happen because at that point in time, the valuations may not be in favour and your returns may not be attractive at that point.

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