'IT & Pharma Two Fastest Growing Sectors Have Been Encountering Headwinds In The Global Markets'
Prateek Agrawal, Business Head & CIO, ASK Investment Managers speaks to BW Businessworld on his current take on the Indian Equity markets, imminent global and local risks, his favorite sectoral picks and on why he doesn’t like to take cash calls in his PMS
You worked with Bharti AXA and the erstwhile ABN AMRO AMC before joining the ASK group. How different is it to manage PMS money, compared with working at an AMC?
MF platforms were a great learning experience. I thoroughly enjoyed my stints on those platforms, built teams, helped scale them up, delivered a stellar performance, and have fond memories of the same. However, managing money in a mutual fund setting is very different from managing money in PMS. It, starts with the quality of money that one has to manage, the target investor segment and the deliverable that a fund house has towards its investors. At ASK, for our HNI/family office/ institutional clients who have a long term orientation towards equity, we seek to deliver capital preservation and growth over a period of time. We thereby focus on strongly free cash flow generating businesses which are able to grow in a visible manner over long periods of time on the strength of their market positioning and competitive advantage, thereby creating wealth for their investors. If we are able to buy these businesses cheaper than value, that is an added source of returns. Our investment philosophy has been converted into a set of rules and filters that makes our team very disciplined and focussed on quality and growth. We believe team based approach that we follow towards investing is a big reason for our success in managing very concentrated portfolios of around 20 names. This helps in getting a well-rounded view on the portfolio. Investors have liked our value proposition and we have seen a strong growth over past 4 years and our Client AUMs & Advisory have crossed Rs.11000cr.
What's your take on Indian equities right now? When do you see earnings growth picking up?
We believe that growth is already picking up. 2nd half of last year itself presented a great combination for growth to pick up with tail winds of pay commission award and a good monsoon. October of 2016 saw strong growth across categories. Demonetisation did impact the growth story for a while but we believe that consumers are again back. Month after month, the numbers are improving. We believe that after registering de-growth on a yoy basis in the months of Dec, Jan and Feb, the month of march probably saw a small growth. April has been strong on the retail side.
We expect that the deferred demand from the demonetisation period would provide tailwinds to categories like consumer durables, autos, etc. Lower interest rates should help consumption across the board including housing which would be a big driver of the economy.
Post GST (we expect it on Jul 1st), there would be an inventory build-up which would provide a leg up to the economic numbers. Q3 onwards, FY18 numbers would have the benefit of a very low base.
What are the key risks, both global and local that can affect sentiment and topple the markets?
Global risks are manifesting themselves. IT and Pharmaceuticals, two high quality and fast growing sectors have been encountering headwinds in the global markets. However, the fact that commodity prices, particularly oil, a big component of our import basket, is down helps our macro. If interest rate increases globally are a response to strengthening economy, they should be digested well by the equity markets.
On the domestic side, if monsoons are deficient in South India, it would be a problem since reservoir levels are low there.
But overall, given that the government continues to be on the path of fiscal consolidation, we expect competition for capital to reduce and expect interest rates in India to retain a softening bias. This should help maintain market valuations.
As a strategy, what's your take on cash positions within an equity PMS? Do you generally believe in staying invested most of the time?
Yes, we stay fully invested most of the time. We believe that cash is a source of risk and asset calls hurts performance over a long term rather than aid performance. Moreover, our clients are HNIs/ Family offices. They follow asset allocation at their end. The money that we have from them is their allocation to equities. It is our job to keep that money invested in an areas that we believe offer upside.
Also, taking cash call is a strategy for managers whose funds have Betas significantly higher than the market and they may seek to reduce the same by taking a cash call when markets are bearish. Given our focus on steady businesses which are able to compound earnings over long periods of time, the risk measures of our portfolio tend to be exemplary. For example, for our largest strategy, the IEP, it has happened only once (during the recent demonetisation period) that the strategy has fallen more than the market in any period of a significant market fall. Our portfolios typically fall by a significantly lesser amount and perceived benefit of raising cash has a very low chance of getting realised.
Do you think we're at the cusp of a bull market? What would your broad advice to investors be now, from an asset allocation standpoint?
After multi-year of earnings stagnation, we believe that FY18 should witness a strong earnings growth. This should help the market sustain its valuations and grow with earnings. The improved macro supported by government fiscal discipline should keep the interest rates low. Lower interest rates support lower discount rates. This makes the value of future earnings higher in the present.
Given our strong growth outlook post GST as explained above and our belief that market valuations would sustain given the lower discount rate, we believe that as compared to other asset classes, equities should be able to generate better returns over a period of time. Investors should take the help of their advisors and have their exposure to equity according to their risk appetite.
Lastly, what sectors do you see outshining others in 2017? Do you have any favourite value picks at the moment?
We believe that NBFCs particularly in asset management and insurance businesses, cotton home textile companies targeting the US, chemical companies which are benefiting from Chinese focus on pollution control, and tyre companies present interesting opportunities at this time.