Dear Investors,
Hope you are doing well. Below is the chart depicting our portfolio returns to date viz BSE 500 index.
In this memo, we wanted to highlight three points:
The Russian/Ukraine war has been a no event for financial markets
The lockdowns in China is likely impact global supply chains for another 12 months
The impending food inflation can impact demand in India
SUMMARY: We maintain that this is a good time to invest. We are investing incrementally in Pharma, IT, Consumer, BFSI and Manufacturing.
Markets back to where they were pre the Russia-Ukraine conflict
We begin with the discussion from where we left in our last memo where we highlighted that statistically speaking markets tend to overreact to geo-political conflicts in the short term and recover well in the medium term. The same has played out. The MSCI all country world index is now trading higher than the value when NATO first raised the alarm bell for an attack. Thanks to this panic selling, fund managers having a long term investment outlook had a good buying window. Refer below:
Similar trend has been seen in the BSE 500 index which is up by ~ 9% from its lows in the last 3 months. During the same period, the divergence in the returns of sectors that have been adversely impacted by energy/oil (Cement, chemicals, manufacturing) and sectors that are not (Energy, Mining, Metal, O&G) has been significant. Refer to the chart below.
While we would love to find investable (>15% ROCE) businesses in these sectors, the cyclicality in price and inability of the managements by-and-large to control their P&L, makes us cautious. As a result, you would see our portfolio performance lag energy/commodity indices in the short term.
Our investing framework is most suited to finding sectors/companies that have a strong MOAT, have underperformed in the past due to non structural reasons, and have a good growth outlook which is not baked in the current valuations. As displayed in the 1 to 5 year data above, we find the risk reward between growth and valuation right in the following sectors:
Auto/auto-anc (~ 20% of portfolio): Growth driven by strong exports and EV tailwinds. Valuations still in mid- teens.
Pharma/Agrichem (~25-30% of portfolio): Domestic branded pharma growing at steady pace. Spl chemicals exports continue to expand.
BFSI (10-12% of portfolio): Credit growth improving MoM, valuation at bottom 10-30% percentile.
Consumer and Consumer tech (~20% of portfolio): Able to pass on RM price rises. Demand remains robust so far.
IT/ITES (~ 15% of portfolio): Selectively investing in names where valuation is at par with growth.
The lockdown in China and its likely impact on global supply chains
The recent stringent lockdowns in China have been in response to a sub variant of Omicron. The same has affected ~ 50-60 mn people in 5-7 major cities in China. The same has disrupted functioning of ports, mfg plants, mines and the like. Honk-Kong and Korea are already reeling under their worst COVID-19 spread. The situation could become worse for the next 3-6 months and can not only further hamper supply chains but could also lead to a rise in COVID infections in India. We have typically seen a 3-6 months lag between caseload rise in China and India. We are therefore carefully evaluating our portfolio for any future disruptions in topline and margins.
The impending food inflation and its impact
The Reserve bank has been so far maintaining its low interest rates/pro-growth stance largely due to range bound numbers of inflation. Refer below.
We however believe that the food inflation would rise significantly in the near term. The urban demand environment for consumer goods has been buoyant so far. We believe that future pressure in prices of wheat, oil and packaged goods can dampen demand for the near term. Our future portfolio additions in consumer goods will be determined by QoQ performance on earnings.
Please feel free to write to us.
Prescient Capital
Contact us: https://www.prescientcap.com/contactform