Name: Prashant Kothari
Job: Portfolio manager at Pictet Asset Management
Years investing: 11 years
Based: London
What is the asset class and geography you are focused on?
Indian listed equities.
What is the outlook for the month ahead?
We are long-term investors and hence do not try to predict short-term movements in the stock market. The Indian economy is coming out of a long slowdown. GDP growth appears to have bottomed out at 4.6 per cent last year and should now accelerate. Cyclically, economic indicators have started looking up in the form of higher vehicle and cement sales. Structurally, there have been some good reforms in the past 18 months, which should continue with the new business-friendly government. These reforms help to address the current-account and fiscal deficit problems in India. The investment climate has improved and should lead to a good recovery. Inflation has been high in India for many years, but it appears to have peaked thanks to policy measures from a tough central bank. Inflation should continue to fall, giving a cushion to the central bank to provide monetary stimulus starting next year. So, from monetary, fiscal and policy angles, the Indian economy looks all set to do much better. The budget, presented by the new finance minister, lacked big-bang measures but had enough positive policy prescriptions to put the economy on the right path.
What are the main risks to the outlook?
The biggest near-term risk is the weak monsoon. Indian agriculture is still largely rain-fed and therefore weak rains impact agriculture production that in turn impacts rural consumption. Another negative impact would be higher food inflation, which feeds into broader inflation indexes. The monsoons are only halfway through, and the recent trends are encouraging, but a season-till-date deficit of 30 per cent is nothing to cheer about. The global geopolitical developments, especially in Ukraine and Iraq, can also move the sentiment locally. Iraq is more significant, as it can impact oil prices. Oil is about a third of India’s import basket and hence high crude oil prices worsen the trade balance.
What is the best investment at the moment?
The best investments today are in the domestic cyclical stocks in India, as they benefit from the economic recovery in the years ahead. Both structurally and cyclically, the Indian economy is ready for a rebound. Domestic cyclical stocks provide the best leverage to play on that theme. Our portfolio is positioned heavily towards financials and consumer discretionary stocks to reflect this view.
What was the best investment you were involved in?
My best investment in the last 12 months has been Axis Bank. This is the third largest private sector bank in India with fantastic management and a track record of 25 per cent compound annual growth rate at 20 per cent return on equity for the past 10 years. Concerns on its asset quality were at a peak in the middle of last year as the Indian economy and currency were going through one of their worst phases. MSCI deleted Axis Bank from its indexes, so many benchmark-hugging investors dumped the stock. However, we saw opportunity in that irrationality. The bank was not broken and our research confirmed that the asset quality was far superior than what the market feared. We built a big position in the bank, taking advantage of the cheap prices. The stock has gone up 150 per cent from its lows last year, and has contributed massively to our portfolio performance.
What was the worst?
The worst investment was TBZ, a jewellery retailer with a strong brand in India. We invested in it after our due diligence – financial analysis, factory and store visits and management interaction. However, to control spiralling current account deficit, the Indian policymakers imposed severe restrictions on gold imports. That affected TBZ’s business materially and we ended up booking a loss of about a third on our investment.
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