Till the currency stabilises, we are going slower than usual with our investing, Prateek Agarwal, Business Head and CIO, ASK Investment Manager, tells ET Now. 65763684
Agarwal says being conservative, they are focusing on consumers including FMCG, durables, autos and financials which include retail private sector banks.Edited excerpts: How are you looking at the markets right now? Does it seem like most of the damage is behind us or is this just the tipping point? Is the beginning of it all with the rupee, the bond yields as well as what the crude is up to? We would believe that things have stabilised only after the currency stabilises. A week or ten days of currency stabilising will probably get the confidence back into the market place. The indices have corrected sharply. On the other hand, the economy seems to be ticking up nicely. While we do understand that second quarter results may not be as good as what we saw in Q1 on account of the Kerala floods and also the higher base effect post GST period last year. Therefore, quarter two would be a bit soft but the economy seems to be ticking up which means that the larger cap indices should find their feet as soon as the currency itself stabilises. How are you looking at the opportunity arising out of falling currency and rising oil prices from a market standpoint because the broad view is this is a double whammy? Yes, it is a double whammy, but it cannot just keep resulting in rupee sliding. It has to stop somewhere. What has happened in the interim is that because of several fears including increase in interest rates by the regulator, a good part of the market has seen a sharp cut. Interest rates may go up. We also believe interest rates will go up supported by the strength in the economy. It also would happen in response to a weakening currency in a bit to hold up the rupee. So, those are the factors working for interest rate increase but that said, in the NBFC space, at least the better ones have the wherewithal to pass on a bit of increase. That presents a good space to look at once the currency stabilises and interest rate increases have already happened. Till some degree of certainty improves, the space can continue to be very volatile. One space that we do not want to really go to just yet and do not want to look at just yet is the midcap space. If you track the flows into mutual funds, the flows on the net side are falling, given what is happening this month and the year leading up to this month. If the flows turn negative, especially for the midcap part of the market, that can be very damaging for the stocks in that space. It will present a good opportunity to look at that space and buy. What are the ideas that you are working with right now because we are getting quite a bit of contradictory views? Most experts say stick with defensives like IT and pharma because that is the safest pocket. Some believe this decline should be bought into and you should look at some of the cyclical stories. Which part of the camp do you belong to? We are with financials and consumers. That is what is there in the portfolio. In terms of building the portfolio, we are more conservative than most. Cyclicals, we understand is a great trade just now especially global cyclicals. Rupee depreciation makes steel, aluminium, etc, look good in rupee terms and the rupee costs for all of these manufactures — aluminium, steel and zinc. So, good earnings should be expected from this pack in spite of overall global weakening trend in prices. I understand where it is coming from but this is not a place where you can build a thesis of continuous compounding of earnings. It is a trade at the end of the day. We typically let go of such opportunities. We wish to stay focussed on businesses which are high quality and can compound over long periods of time.What is your view on some of the defensive names which are coming at a high price right now? It seems in a market environment where macros are challenging, you cannot bet so much on the investment cycle or rate sensitives barring autos because that is more of an extended consumption theme. Is it really the high price consumption sectors which have to keep your faith irrespective of valuations? Yes. Like I said, that is the space that we are focussed on. Consumers include FMCG, durables, autos and financials which include retail private sector banks. It includes NBFCs focussed on retail, insurance and mutual funds. That is the space that we are focussed on versus others. There are a few export-oriented businesses. There are a few which we believe can compound and there we have an exposure too. We would want to see currencies stabilise and till it does, we are going slower than usual with our investing. Any themes where you want to be contrarian in this market right now like the power utility space, PSU banks? Any segment where you think there is value emerging but the market is not recognising it? Neither of these spaces are high quality in terms of high ROCEs. They do not filter out into our consideration sets. A lot of regulatory issues have to be taken care of. We stay away from power over past eight years. We may have invested into a power transmission funding business for a brief while but that is about it. On the PSU bank side, as we go forward, banking in general will face a lot of pressures. We already seeing high dosage of NPAs and that was when that the PSU part had the advantage of low cost funds. Now that advantage is going away. More importantly, as businesses grow larger, they will get themselves rated and disintermediate banks can go directly to mutual funds. That is clearly happening and it will put more and more pressure on the large corporate lending business of any bank. Frankly, this means that SME lending, retail lending is what banks will be required for. That is where they will make their margins and if we have an entity that is focussed there or even smaller lendings like micro finance, etc, that is where we will go in banks rather than corporate lenders. That has been our thoughts for some time.
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