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Cautious on market as macro challenges persist: Bharat Shah, ASK Investment Managers

"The performance has been very good, but there is a point up to which micro can rise without adequate help from the macros", Bharat Shah said.

ET Now|
Nov 23, 2012, 01.53 PM IST
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Cautious at current level; macro cues must improve: ASK Invst

In an interview with ET Now, Bharat Shah, CEO & Managing Partner, ASK Investment Managers, talks about the current market scenario and the sectors to watch out for. Excerpts:

ET Now: Construct the market environment for us as many long-term believers are of the view that we have all the ingredients of a bull market and next two or three years will be rewarding for investors.

Bharat Shah:
Over the last one-and-a-half years, my view has been that market prices were behind the fundamentals and pessimism was ahead of the prices. To that extent, while people were unwilling, I felt that it was important to participate in the market because there were opportunities.

But today, at this juncture, I would be a little more careful. The micro picture still looks pretty good. Companies have performed well, businesses have turned out good numbers, though nothing outstanding and different than what you would have expected. So, the performance has been very good, but there is a point up to which micro can rise without adequate help from the macros.

The challenges on the macro remain; especially the global macros are very difficult ones looking at Europe and the US. But the Indian macro challenge is also not insignificant. At this juncture, prices are just finally posed, they are not overpriced, but they are certainly not under priced, broadly at market level.

I am now relatively more careful and if the macro challenges persist, then there is up to a point only that micros can keep rising despite those challenges. To my mind, that stage is kind of being reached or has been reached. Therefore, I would be more circumspect at this juncture.

ET Now: You are sounding slightly bearish.

Bharat Shah:
I am not bearish, I am just watchful. There are still a number of businesses that I like, but individual stock picking and some of those stocks doing well is one aspect.

As far as individual businesses are concerned, still there are plenty of good businesses. I would say three things. One, given what my view is on the broader situation, the stock picking will be very critical.

Second, sticking to quality will be a very material idea. Third, you will have to be very patient at this juncture with the investments that you nurture. So easy and quick pickings is not something that I can see on the environment by and large.

ET Now: Which are the sectors that you are currently asking your clients to completely avoid and which ones to go out there and buy even at the current levels?

Bharat Shah:
Those have remained more or less the same and consistent ones. Basically, there are some core characteristics that we want to see in the businesses. They must have a large size of opportunity, a meaningful growth rate and growth which is sustainable, predictable and relatively more consistent.

They must have a level of capital efficiency and return on equity where there is scope for meaningful value creation and the businesses where there is a reasonable margin of safety. In other words, the price is at some discount to the value.

The size of opportunity, the rate of growth and its sustainability, and the quality of growth are the key watch words based on which I like or not like businesses.

I continue to prefer many consumer businesses. Valuation on individual businesses would still be a challenge, but I believe there is a deep-rooted long-term sustainable above average growth rate available in these businesses in an environment of exceptionally high capital efficiency.

Pharmaceutical businesses, by and large, meet with the case, especially the ones which are focused on international opportunities. Select banks, non-banking finance businesses again pass the test.

 



There are select automobile businesses and auto parts businesses where again, despite short-term technical challenges, the long-term picture still is healthy and very rewarding one.

Capital goods businesses have short-term technical challenges in the form of order book, but are good players with clean balance sheets, healthy return ratios and superior record of delivering over a period of time.

In general, the businesses which are extremely capital-intensive, which require upfront capex with uncertain revenue in the future, greater episodicity rather than predictability and the businesses which have mediocre return ratios in terms of return on capital employed and return on equity are the ones we do not like. There are plenty of businesses that we probably will not like to participate in.

ET Now: According to you, in your three pillars of investing: size of opportunity, capital efficiency and valuations; all the businesses which you like or all the companies you own, my understanding is that they are expensive. Given the way things move globally, the markets have been hiding in some of these good-quality companies. Do you think in the near term, these good-quality companies run the risk of underperforming?

Bharat Shah:
That always is possible. But the game is not about performing every single day, week or quarter. The game is about winning eventually. So winning the war rather than trying to win every single battle on the way. If you win both the war and the battle, much nicer, but if the focus is entirely on winning battles, then we run the risk of losing the war.

There will be periods of time when some of the quality businesses would be at prices where there is not meaningful margin of safety. It is important to have patience to wait. Trying to make a compromise on quality in order to buy an arithmetical cheapness is very bad. That is clearly a no-no as an option. So you want to be only in a quality space and within that you want to find opportunities which pass the test of valuation and sustainability.

ET Now: At the current juncture, what is your portfolio strategy since you are dealing with public money on daily basis, you may be getting inflows and outflows? The fresh money which you are getting, are you investing it or not with the view that markets will correct and you will be able to get better entry points?

Bharat Shah:
We do not believe in timing the markets. We are not timers of the market. At the backdrop, there is always recognition as to where the markets are reasonably priced in general or expensively priced. To that extent some tactile calibration is done, but broadly we do not try to time the market.

Given the meaningful challenge on valuations and reasonableness of the price available in many instances, our approach is firstly try to buy businesses which have predictable earnings growth rather than the highest earnings growth.

Secondly, look for superior quality as a prime factor rather than the highest earnings growth, and thirdly, do not sacrifice quality in the illusion of buying cheapness. These are the three factors or fundamental parameters for building our portfolios in that order with some challenges.

We are building and constructing our portfolios over reasonably short term once we get the money in. The challenge is not really that whether there is enough opportunity in short runs, as our portfolios would not require more than 20-22 names.

There are even more than those numbers of names available in the environment. So, in a boarder manner, sacrificing quality and trying to buy in an illusion of cheap price would be a very bad compromise to make and we are unwilling to make that.

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