This is the time to build portfolios of the best businesses: Akash Prakash of Amansa Capital

Akash Prakash of Amansa Capital has advised in his latest article in the Business Standard that this is the time to build out portfolios and concentrate holdings in the best businesses and best ideas, This will deliver strong differential performance on the way out of this downturn, he said.

He also pointed out foreign investors are very optimistic on the long-term outlook for India. This is partly because they are disillusioned with China.

"I have not seen investors this optimistic on the long-term outlook for India in years," he stated.

"A combination of geopolitics, erratic policy-making and the downside of extreme centralisation of power with no checks and balances has combined to cool sentiment towards China. The events and policies of the last 18 months in China have introduced an element of uncertainty and risk that investment committees and boards are uncomfortable with," he added.

He also pointed out that a clear takeaway is that over the next few years the allocations to China will at the margin reduce. Also, there is a lack of choice for foreign investors desiring to invest in emerging markets. Russia has become a pariah. Taiwan has geopolitical concerns. Korea is likely to move out of the EM universe. There are worries about Brazilian politics. India is clearly benefiting from this dynamic.

He also opined that while the allocation to China may stagnate or diminish mildly, the allocation to India will increase. However, because the valuations of Indian stocks are still seen as expensive, foreign inflows will take time as investors wait for better entry points.

As regards the short-term outlook for the market, Akash Prakash echoed the thoughts of other seasoned investors he interacted with that the present correction is not a simple market correction, where after a 20 per cent drop the market would stabilise and start moving up again, but is more of a cleansing event of huge excesses and value destruction on a massive scale and potential for some large blow-ups.

He also pointed out that most experts are of the view that inflation is genuinely out of control and that Fed tightening will be more aggressive than anticipated and the consequences of simultaneous quantitative tightening with rising rates were unknown.

"The Federal Reserve will be forced to tighten into a slowing economy, and given how far behind the curve it is, its need to re-establish credibility will trump fears of causing a recession. The Fed put is gone and looking at history, chances of a soft landing for the economy are very low," he said.

He also warned that we had only seen the first wave of the correction, wherein multiples normalise. We have yet to see the next wave where earnings expectations adjust downward and then finally multiples correct once more and markets bottom with low multiples on below trend earnings.

"Many felt that the odds of a recession in the US, in 2023, were upwards of 60 per cent. Clearly, earnings expectations have not adjusted for a recession. Given where we are on inflation and the tight labour markets, corporate profitability in the US is simply too high. This adjustment will cause the next leg of the downtrend," he added.

"We have seen mayhem in high growth/no profit tech stocks, but ultimately even the tech titans will correct and then finally the market blue chips," he said.

He also alluded to the possibility that the sombre outlook being projected by some experts could be already reflected in prices and can be treated as a contrarian indicator to become more bullish. However, he warned that this may not be so as the consensus is not as bearish. There is still too much hope and belief that this is just a bad dream, and will soon go away. "Also, the folks I was speaking to are in my opinion the smart money, very seasoned and sophisticated investors, not people I would bet against. They have seen cycles," he stated.

"We are going to have a volatile and difficult few months ahead. This is the time to build out your portfolio and concentrate your holdings in the best businesses and your best ideas, so that you can deliver strong differential performance on the way out of this downturn," he concluded.