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Buy clean, market leading franchises and you will make money over 3-4 years: Saurabh Mukherjea

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Buy clean, market leading franchises and you will make money over 3-4 years: Saurabh Mukherjea 2

Do not get lost in short-term frenzies both on the way up and the way down, says Saurabh Mukherjea, Founder, Marcellus Investment Managers.

Yesterday, the Sensex closed below 50,000 as the market fell 1,145.44 points. Was it an aberration?
We have seen this pattern for a long time from late March last year. Once the market started recovering from the wild panic, we have seen this two steps forward, one step back pattern. Whether the one step back is because of the Covid second wave in India or due to indifferent macroeconomic news with rising bond yields, does not matter so much. We have seen this pattern for the last 9-10 months and I suspect we will maintain that pattern.

I see these corrections as quite healthy. Every time we start seeing broken balance sheet large caps or really low quality small caps starting to fly, thankfully we get one of these corrections in India which takes the market back 5-10% and takes the froth out of the market, This is a similar sort of phase. As for how long this will continue — we have never tried to hazard a guess even in previous corrections.

Focus on clean companies, clean accounts, good corporate governance companies. Secondly, focus on companies with market leadership, established dominance; and thirdly, look for companies with track records of sensible rationale capital allocation. Buy into such firms in the early stages of an economic recovery and you will struggle not to make money over the next three-four years. We are in the early stages of what looks like an economic recovery. Buy clean, well-run, market leading franchises and you will make money over three to four years. Do not get lost in short-term frenzies both on the way up and the way down.

There is no denying that we are in the midst of a bull run. But in India, when cabbies and pan-sellers start talking about shares, you know it is time to exit. Do you agree?
We have had excess liquidity since the Lehman brothers crisis. right The bout of quantitative easing we saw in 2020 was an altogether different magnitude but the QE has not gone away. It is not as if the Federal Reserve has suddenly said they are withdrawing. If anything, three weeks ago, the Federal Reserve reiterated that they were going to keep printing money and were going to keep yields very low for the next couple of years.

Similarly, in India, the RBI too has gone out of its way to ensure that there is abundant liquidity in the system. One can see that with the best run banks in the country borrowing money and some of the lowest rates ever. I have seen top banks and top NBFCs borrow. So it is not as if the QE has evaporated overnight. Clearly as we go into an economic up cycle — and it does look clear in our country on the basis the company specific and macroeconomic data over the last three-four months — steel and oil prices start rising. We have seen that over the last three-four months and as oil prices and steel prices start rising, there is a degree of bond yield hardening. There is nothing particularly unusual here.

The bulk of the 2004-2008 rally took place when bond yields were drifting up between 2004 and 2007. It is a natural to see bond yields hardening in the early stages of the economic recovery. At the moment, because of the euphoria around the last seven-eight months, people are looking for reasons to take profits. As a result, we see this two-steps forward, one step back pattern. I do not think we should get too worked up about it as long as we carry on focussing on the economic recovery which is about real power consumption, steel consumption in our country. These are touching all-time highs.

Speaking to mortgage lenders and to real estate developers we are seeing a nice recovery in that sector. Real estate has forward and backward linkages and we are clearly seeing a broad-based recovery across auto, real estate and manufacturing. Exports are picking up. Invest in well run companies who benefit from a two, three, four years of economic recovery. Do not lose track in two-three or day-to-day market movements. Nobody can make money there. Do not get carried away by the market, nor get jittery by pullbacks. We are bound to see pullbacks in a bull market.

How big a spoiler would be the rise in Covid cases at a time like this?
The panic around Covid last year was obviously massively overdone. I saw people throw away portfolios built carefully by investors over four, five, six years. They just chopped it away in the panic. It is very easy to create panic around issues like Covid and because of the sort of complicated dynamics and this whole UK variant and the South African mutant variant, it is very easy to create public health scare around this.

My submission would be we clearly seem to have got the better end of Covid compared to many other countries like the USA or the UK or Italy. I do not know if it is due to genetic underpinnings, we seem to have come off quite lightly around Covid over the last 12 months and I do not see why India will suddenly do a bad job around Covid over the next two, three, four months. We should be careful and wear masks, use sanitizers and maintain social distance but panic around Covid is unwarranted.

The economic momentum with recovery is clearly broad based and my reckoning is that economic recovery will continue; we just have to focus on that rather than getting lost in the hype and the hoopla around Covid.

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