In an interview with ETMarkets, Shah, who has over 2 decades of fund management experience, said: “Through this framework, we aim to identify leading companies, with competent management, at valuations reasonable.” Edited excerpts:
Do you think the old adage “Sell in May and leave” will come true in 2022?
Stock markets around the world and in India could remain volatile due to lingering geopolitical issues in May.
Rising commodity prices are expected to impact Indian macro-economies, with crude oil prices hitting a 14-year high. There are fears that rising food and fuel prices will have a negative impact on global growth.
Then there is the risk that the US Fed will tighten its key rate more aggressively than expected. Given these developments, it would be prudent for investors to focus on asset allocation, which would help mitigate overall portfolio volatility to some extent.
Investors looking to allocate money to stocks for the long term may consider investing systematically.
What’s your take on the gains that have come so far? A sector that disappointed you?
Corporate earnings for the March 2022 quarter were encouraging and were not deterred by the Russian-Ukrainian conflict.
We have seen an acceleration in earnings growth in retail banks, electric utilities, industrials, materials and IT services companies compared to the pre-Covid era.
The growth of the PAT of certain sectors with manufacturing vocation surprised positively. However, India Inc.’s margins came under pressure due to rising input prices.
Due to this consumer discretionary, the sector was negatively impacted largely on expected lines due to higher prices, weak consumer demand and rural slowdown.
How do you see the broader markets in the current scenario? Do you see some volatility in the context of a likely rise in interest rates over the next few quarters?
Broader market volatility is expected to continue given rising inflation and rising interest rates. Therefore, an investor looking to invest in mid and small caps should be aware of the fundamentals and assess whether the company has the wherewithal to withstand the changes taking place and make an investment decision accordingly.
What is your mantra when it comes to picking stocks?
Here are some rules we follow –
a) We believe the key is to find companies with the potential for superior and sustainable earnings growth.
b) It is the delta of long-term earnings growth that we focus on, which we believe can cause a company to revalue.
c) We follow a BMV (Business, Management and Valuation) framework, which aims to identify resilient companies with long-term growth potential.
Through this framework, we aim to identify leading companies, with capable management, at reasonable valuations.
e) With resilient growth and a sustainable competitive advantage, a business can have the potential to not only survive difficult times, but also survive an influx of competition.
f) Also, in good times, these businesses tend to thrive. Once potential companies have been identified, we aim to focus on quality of management, corporate governance standards and ESG metrics, to name a few.
g) The next step is evaluation. Good business and competent management are not always cheap. So we aim to buy good companies with good management at reasonable valuations. However, we would avoid buying a business at all costs.
Inflation is likely to become the biggest threat to stock markets and India Inc. All the sectors that could be most affected and why.
The impact on demand of price increases or impending price increases is something to watch over the coming quarters. Margin indications provided by companies will be a key aspect to monitor.
Do you think investors are better off underweight stocks that are likely to be affected by rising inflation, interest rates, etc.?
We believe that a much deeper analysis is needed before making a decision. Indeed, price volatility is a given when it comes to stocks. But, the important aspect here is that the prices of good companies may fall due to market factors, but will eventually tend to recover.
Thus, the need here is to identify companies that have shown resilience in difficult market situations and have the ability to mitigate the impact of rising inflation and interest rates.
The caveat being that demand may be affected in the short term. Thus, investors must maintain a long-term view and continue to hold on to good companies.
Where do you think smart money is going in the first half of 2022?
A) During the March 2022 quarter, we saw foreign portfolio investors increase their exposure to metals and mining, food and beverages, telecommunications and utilities, by reducing their exposure to software, services financial and consumer products.
They remain underweight in the discretionary and basic sectors compared to the sector weights of the BSE 500 index.
Going forward, the guidance provided by Indian companies in the current earnings season and geopolitical factors will influence the direction of flows from domestic REITs and institutional investors.
FIIs have been net sellers in Indian markets for some time now. Does it make sense for investors to lighten positions in stocks held by FII where foreign investors have a double-digit stake?
We believe the FII selloff is one of many data points available. There will always be buying and selling activity. Thus, the mere sale of FIIs is not a sufficient reason to reduce an investor’s exposure to a particular company.
When buying a business, investors need to take a long-term view. One may consider selling if the investment thesis established at the time of investment has changed due to external factors, thus creating a negative long-term implication.
In the case of names in our portfolio, if a company continues to meet all the parameters of our BMV framework, we will continue to hold that name.
(Disclaimer: The recommendations, suggestions, views and opinions given by the experts belong to them. These do not represent the views of Economic Times)