Sunday July 6, 02:14 AM Beating Inflation
By Rahul Jain
Burgeoning inflation. A term which is now as much part of the list of concerns of the biggest corporations as it is of the list of worries of the ordinary individual. Whichever way one looks at it, the impact is clearly deep and devastating (see chart). And for those shelter-seekers of the markets who have burnt their fingers or are simply untested, it has become the biggest worry: will investment in equity be fruitful? If not, are there investment avenues where the principal amount can at least be protected in these tough times?
Amidst such pessimism and concern, it is appropriate to note what the legendary Warren Buffett, in his 1990 chairman's letter to shareholders, had written. "The most common cause of low prices is pessimism- sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer," says Buffett. And as seen in the past, it is not just the search for solace that leads one to believe in what the quote implies. The situation is not that bleak as it is seen by many to be. You can invest!
Sift and select
Sift and select
Considering the situation in the markets, there is a need to follow the examine- cull-and-choose format. Advises Tridib Pathak, chief investment officer, Lotus Asset Management Fund, "Investors must look at companies which have better pricing power. Companies which, if they come under pressure, can pass it on to their consumers." Some fast-moving consumer goods (FMCG) (see chart) are examples of companies which fall in the category of companies which have better pricing power. Also, one of the best aspects associated with such companies is that they are largely debt-free and even if their input costs rise, they can sustain margins primarily due to brand penetration.
There is also a need for digging into the past. A look at the companies, which became instant favourites in the market and lost their sheen for reasons varied and known, would serve as good indicators for the current decision-making process.
Adds Venkatesh Subramanian, an independent analyst, "A substantial part of the rally, which continued till December 2007, was brought about by taking into account the embedded value or the sum of the parts valuation in the recommendations. One couldn't gauge that the rally in stocks was not based on the company's core business. There is a need to focus on those companies which have grown on their core business and you need to verify that the valuation of such companies is not inclusive of their subsidiaries' businesses (embedded value, SOTP)." He says, "It is also advisable to look at those companies which don't have subsidiaries. The reason being, any movement in the stock would bring in clarity as to what has been the contributory factor for the trend."
It is also necessary to look at companies which are self-dependent in terms of funds requirement, companies which are efficient in generating funds through internal accruals, and the ones which have already put up capital for expansion purposes. And these are the companies which are different from those which are cash starved and resort to means of financing like public issue, FCCB, ADR, GDR, etc. Companies which fall in this category are those which have the ability to utilise internal accruals for expansion purposes. Some of these companies are debt-free. And hence, they can manage to fund their expansions even in tough market situations. Also, it would be prudent and diligent on the investor's part to take exposure to sectors or companies where valuations are attractive. Explains Pathak, "Valuations in banking, media, capital goods and engineering (on a selective basis) have corrected and have become attractive. And we believe that these sectors would stand the investors in good stead." Even though interest rates have risen on a periodic basis, the banking sector has maintained a steady net interest margin of 3%, which is a healthy margin. Also, the media sector, due to its better pricing power, seems an attractive bet, says Pathak.
Beyond equity
Although equity as an asset class has always been the biggest hedge against inflation, given the current uncertainty, you might not have the appetite to take those risks. After all, seeing the market gyrate can be funny on the belly. Obviously, the same reasoning that was applied to equity investing applies while investing in equity mutual funds too. Selecting funds with a defensive bias would be a good idea, reckon most experts. And there have been a plethora of funds that have not fallen to the extent that the market benchmark has. There are a number of such funds and they can be located by using search engines on specialised mutual fund websites.
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