The volatility was on the back of the Russia-Ukraine war, Israel-Palestine war, high global inflation, rising crude prices, peak US 10-year yield, weakening rupee, and consumption slowdown. Still, the Nifty managed to touch 20,000 on 11th September, 2023 and the BSE Sensex surpassed 67,900.
While going ahead, experts expect volatility in the near term, they have an overall positive outlook for the Indian equity market, especially in the long term.
In this volatile market scenario and on the back of the upcoming festival Diwali where major investors consider starting new investments, Parag Parikh Financial Advisory Services (PPFAS) Mutual Fund’s (MF) Chief Investment Officer and Director Rajeev Thakkar has come out with a letter to investors advising how to construct a strong portfolio and the way one should approach doing it.
In the letter, Thakkar noted that when they are looking to construct portfolio, they try to select attractive investment opportunities for the portfolio. According to the expert, attractive investment opportunities are companies that have great promoters / managers who are aligned with the minority shareholders’ interests, are capable and competent in their business and work steadily towards creating long-term wealth for shareholders.
“A great business is defined as one that creates good returns on Invested Capital, which does not need too much borrowing, and has some long-term competitive advantage,” Thakkar said, adding that one should also make sure the shares are available at reasonable valuations.
“When we apply the above filters, there are many sectors/companies which do not qualify. We do not invest in those. Just investing in companies or sectors that are seen to have attractive growth prospects due to policy changes or other sources of volume growth is not a sure-shot formula for investing success,” advised the expert.
He further highlighted that Benjamin Graham wrote many decades ago in “The Intelligent Investor” and drew two morals for its readers:
1. Obvious prospects for physical growth in a business do not translate into obvious profits for investors.
2. The experts do not have dependable ways of selecting and concentrating on the most promising companies in the most promising industries.
Thakkar explains the above with 2 examples:
Example 1: Private airlines in India
Prior to 1990, civil aviation in India was restricted to the public sector. We had Indian airlines operating in the domestic sector and Air India was operating foreign routes (apart from the foreign airlines operating foreign routes via bilateral agreements with those countries). In 1990, the sector was opened up to the private sector. What would you think happened? Would private-sector airlines be great investments?
However, East-West Airlines, Sahara Airlines, Jet Airways, ModiLuft, Damania Airways, NEPC Airlines, Air Deccan, Kingfisher Airlines and others have not made too much money for shareholders.
Example 2: Private mobile telephone operators in India
In the early 1990s, the telecommunications sector was opened up to the private sector. Prior to this, the public sector players like MTNL, BSNL, and VSNL were the only players in the space. What would you think happened? Would the new private-sector telecom companies be great investments?
Companies like Tata Docomo, Aircel, S Cel, BPL Mobile, Reliance Communications, and many more did not do too well for shareholders.
“You need not go to every party in town on a particular evening to have a good time. We are sure to miss out on some attractive companies or sectors over time. As long as our process helps us avoid a lot of mistakes and allows us to earn reasonable returns over time, that is fine,” guided Thakkar.
Thoughts on the market outlook
In recent times interest rates have been moving up substantially, especially in the developed world, and it is undeniable that low interest rates in some form or the other resulted in an increase in valuations of almost all asset classes across the world. The era of free/easy money has come to an end with the erstwhile zero and negative interest rates looking more like 5 percent interest rates these days, noted Thakkar
But, despite that, he suggests investors to continue to be vigilant on the valuations of existing and potential investments and not be adventurous there.
“The prospects for India and her economy look good. If due care is taken while investing, we should be looking at reasonable equity returns over the long run. However, the past 3-5 years returns have been elevated by the easy money conditions and the post-COVID bounce. It is always wise to moderate expectations and not to be over-optimistic while making financial plans for the future,” he said.
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Updated: 10 Nov 2023, 02:20 PM IST