PMS AIF World Focus on Portfolio’s Quality, Risk and Consistency (QRC)

PMS AIF WORLD organised a webinar with Mr. Bharat Shah, Executive Director – ASK Group and Mr. Prashant Khemka, Founder – WhiteOak Capital for our investors to get answers to questions and worries related to Equity Markets in the current scenario of  COVID 19.

This article presents the interpretations, and excerpts of discussion done between Mr. Shah, Mr. Khemka and Kamal Manocha, CEO PMS AIF WORLD

COVID is a big challenge, but temporary, and Fear is overdone. Investors should not ignore the Opportunities.

Bharat Shah, Executive Director – ASK Group

Markets always have some degree of uncertainty, sometimes more, sometimes less. Today, the uncertainty is certainly more, but, certainly this looks like a short term phenomena.

Human mind is driven by the recency bias, and COVID coming out of a sudden has given the SHOCK. March’20 was a terrible month. But, at the same time, one constantly needs to reconcile between what one believes the future is and what may be reality is. COVID is an important challenge but looks a short term challenge. It does not alter fundamental businesses in a negative way and there are businesses which could gain out of this Challenge. So, there are other positives that one is ignoring and focusing way too much on the negatives. If one takes the sum total of Fear & Opportunities, this is a time to invest, if one has a long term view and if one has a patient capital  for at least 3 to 5 years, rather than 6 to 12 months. And, if this capital is backed by a mind which is equipped to balance between the fair fear and irrational fear, it is a very good OPPORTUNITY.

Let’s talk about of Positives & Opportunities. Fall in oil price is a Big Positive of India. Agriculture sector reforms is another Big positive. The reforms in this sector bring really vital changes. Inflation has been structurally tamed, therefore the cost of capital has come down significantly. This is another Big positive. This has a material advantage from 2 perspectives. One, from the perspective of the users of capital and Two, from the perspective of Investors in the assets. Digitisation is another Big Positive that has implication for rise in productivity, reduction in cost and amplifying possibilities of scalability.

There are strong and weak businesses in each sector. Every such challenge is an opportunity for strong businesses as they will get a chance to increase their market share. And, could eventually show greater growth. Strong businesses can become stronger, bigger & better. As bad capital gets destroyed and good capital gets promoted, this has an implication for the improvement in the overall capital efficiency of the system/ economy as a whole. There are many sectors that could get re-rated. These are like Insurance ( Health, Life, general), Health Care ( including Pharma, Diagnostics), Telecom, Speciality Chemicals, and Entertainment. There are many OPPORTUNITIES to Pick good businesses in these sectors.

Without a doubt, liquidity is driving the markets, but, there is nothing wrong in it. Liquidity driving the prices is a fundamental economic truth. One should remain away from generalisation, as this takes us away from the task of what investing is all about. Investing  is about finding the Good businesses run by Great managements, enjoying trusts of their customers at Sensible price.

COVID is a temporary challenge.

Wealth is not created by timing the market, but, by determining the businesses, and investing in quality that compounds over years.

Prashant Khemka, Founder – White Oak Capital

All valuations globally are benchmarked against the long term US bond yields. In mid 90s, the long term US bond yield was around 6 to 7%. If you were to inverse the bond yields, the multiple for US bonds was 14 to 17 times then. At that time S & P 500 was also trading at a multiple of 15 times, just in line with bond yield multiple. And, all the other markets were trading at some premium or discount depending upon the growth expectations of each economy. Today, US long bonds are trading at 1 to 2 % yields, so effectively bond multiples have gone to up significantly to 60 – 70 times, and the S & P 500 is trading at 20 times. The context is not to suggest that S & P is at a discount to bond yields, but, to convey and explain that why we see high valuations which may continue in the US and other major economies, like India. For valuations to correct, bond yields need to go up significantly which looks unlikely as there seems to be a death of Inflation. Today inflation expectations are non-existent, and world central banks are focused on growth rather than inflation. So, one needs to keep all this in mind, while one perceives equity to be at high valuations.

A particular sector might be seen riskier or negative in any or every scenario. But, there are great businesses in every sector. These are the ones which show attributes of generating superior returns on incremental capital which would then deliver the capital light free cash flow because for that return on incremental capital has to be higher than the cost of capital. Being concerned is not bad, but trying to time the market is like FLIPPING the COIN. Wealth is not created by timing the market, but, by determining the businesses, and investing in quality that compounds over years.

Government owned entities or PSUs world over are a different asset class, different than Equity. In these businesses, management’s interest is not aligned to the minority shareholders, as these businesses are inclined to social purpose & greater public service. So, this could be viewed as separate asset class as in these businesses compounding which is the trait of equity, is missing.

We often times in India fancy the famous investors from Worldwide and take whatever they have to say about anything & everything as a gospel. Particularly, it is surprising to find that we even take the comments about India as Gospel. We forget that all those supposed to be smarter world-wide investors have limited knowledge about India. So, their conclusions for India could be far from reality. Most recent negative predictions in this context should be taken with pinch of salt, rather, a bag of salt.

Unfortunate aspect about such times, is that many fund managers & investors end up becoming macro investors or market timers. Focus should be on stock specific risk factors. Macro factors are like coin flipping. Stock picking also has an uncertainty but its not like coin flipping. Fund manager betting on Markets is like Virat Kohli betting on outcome of Coin Flipping. For both success lies in knowing the game.

Watch the event recording

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