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“Given our investment philosophy and the kind of companies that we or the attributes that we look for in companies, sector such as private sector financials, IT services, consumer, healthcare and both consumer staples as well as discretionary, these are sectors where we tend to find more opportunities,” says Prashant Khemka, Founder, White Oak Capital.

What is really worrying the markets? What are markets trying to price in when you are seeing this reset?
The post-Covid dramatic fall in the market was on worries of demand shock or demand disappearing. Because of Covid, everyone was expected to be restricting their travel and other activities and possibly stay locked up at home for extended periods of time. That hit global demand massively and we saw on a spot basis, oil price going even to negative because the worry was where would all this oil go? Storing oil costs a lot of money and so the spot prices went negative.

Today, we haven see that over the last two years, that demand never disappeared, the demand shock never materialised and today since the start of this year, particularly after the Russian invasion of Ukraine, we are seeing worries and fears of supply shock. Supply disruption was already ongoing because of Covid. While demand did not disappear, supply certainly got disrupted.

As we are all very well aware, with shipping containers’ shortage, the freight ships were taking much longer to clear at docks. The mining output suffering because of the pandemic and the restricted labour supply. There was supply that was already disrupted coming into calendar year 2022 and forget supply disruption, there was a supply breakdown because Russia and Ukraine put together are very large suppliers of commodities like metals, oil and gas and also agri commodities. The world is now worried about inflation because demand has not slowed down commensurately but supply has collapsed.

So from worries of deflation two years ago, we are now in the midst of heightened worries about inflation. It remains to be seen how this actually plays out just as two years ago, the demand collapse situation did not play out, we will have to see whether the supply constraints continue or improve. But that is what currently the market is definitely preoccupied by and most worried about.

In the earlier cycles of recession, we had seen that central banks would come in and print more money, but this time around, inflation is the real problem. How does one expect central banks to manage it and what kind of reaction are you expecting from the markets?
First of all, I am not necessarily in agreement with the assessment that is universally accepted that in the past few cycles, the central banks have somehow saved the world and maintained the high growth scenario.

It is a very simplistic assessment. I do not think central banks are as powerful as they are thought given they lack credit. Inflation expectations for a very long time have been very muted and inflation expectations have been declining for the last 40 years more or less with some intermittent rises. It has not been a straight line. There have been intermittent ups and downs just like we are in the midst of an inflation spike.

Obviously during Covid, the expectations nosedived and since then they have been coming up to more of that longer term trend line. So if inflation expectations are lower and declining which has been the case, that has prompted longer term interest rates to be lower.

I am not talking about interest rates over the next three months or a year or three years but over 20-30 years. The 30 year bond yields have been in a decline for a very long time over the last four decades and that is more to do with longer term inflation expectations.

If the world continues to evolve in a manner that inflation remains sticky for longer and that then has an impact on long-term inflation expectations and then that has an impact on longer term bond yields. If there is no commensurate economic growth to support valuations then the market can remain choppy or be capped on the upside or have further downside. Right now what we are seeing is that near term inflation has spiked up but has not translated into long term inflation expectations rising to any material degree.

What do you make of some of these IT companies getting de-rated? The numbers are decent but stocks are still getting de-rated.
This year, IT has taken the brunt of the market correction and it is in part because of worries of global slowdown, due to these inflation worries or geopolitical worries. If global slowdown were to take place, then global demand for all kinds of products and services might go down.

The fears are that IT spending at Fortune 1000, Fortune 500 firms can be curtailed this year. It is very possible for such a scenario to evolve. Markets are always ahead of the curve on these things though as of now, there is no tangible sign of any of such things occurring.

But if the geopolitical situations were to worsen or globally slowdown was to accelerate, then it is very much possible that might happen. We remain invested in the select IT names and just as we were a year or two ago, even today do not take such top down sectoral calls. Two years ago also we had IT services. Four years ago, we had IT services but at the same time, we also have banking sector names. So we have a good lot of investment in the private sector financials in India. A balance in the portfolio is very essential. At any given point in time, certain sectors will be in favour. Our idea is never to try and make money from sectoral calls because we believe it is impossible to make money by top-down calls on the market or on particular sectors but hypothetically speaking, that is not the case and cannot be consistently the case.

Hypothetically speaking, you can own individual companies in every sector that can outperform the sector over any reasonable time period. Then collectively, as a portfolio, one should be able to outperform the market. That is the perspective that we come from rather than coming from a top-down perspective.

Now IT sector would do well or commodities would do well but given our investment philosophy and the kind of companies that we or the attributes that we look for in companies, sector such as private sector financials, IT services, consumer, healthcare and both consumer staples as well as discretionary, these are sectors where we tend to find more opportunities most of the times structurally, rather than in utilities, energy, commodities in general.

We struggle to find great opportunities. We do have investments to some degree or the other, but these sectors tend to not present as many attractive opportunities given the way the investment team thinks and approaches investing.

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