Nilesh Shah's Top Investment Themes In A Year Of Challenges

The year 2023 is a confluence of several macro challenges, creating headwinds for equity markets globally and in India, according to Nilesh Shah of Envison Capital Services Pvt.However, this also makes it a good time to invest as the expected recovery next year could garner 'phenomenal' returns from a two to three year investment perspective, Shah, managing director and chief executive officer at the investment manager, said in an interview with BQ Prime's Niraj Shah. He cited impact of geopolitical tensions on supply chains, uncertainty on liquidity easing in an environment of rising interest rates and diminishing growth in equity market as compared to the last two calendar years as key challenges.'Cash flow generators, irrespective of tough times or good times, always rule,' the expert said, while speaking about stocks that could perform well in such a challenging scenario.Shah recommends a broad-based portfolio because of emerging opportunities across diverse sectors. 'One has more options now apart from conventional technology or banks,' Shah said..The year prior to general elections is usually terrible for equities, according to Shah. He cited 2018, the year of the IL&FS crisis, as an example of this theory.The situation was similar in 2013, when general elections were scheduled for 2014. 2013 was the 'taper tantrum' year, he recalled.2008 and 2003 were dimly lit years too, while general elections were set to take place in 2009 and 2004, respectively, he said.This can also be seen in 2023 as the general elections are coming up in 2024, Nilesh said.Combined with factors such as macro challenges and expected decelerating earnings, this indicates a downward trajectory for equity markets on an aggregate level throughout the year, the expert said.The market has undergone consolidation for 18 months now, he said. With downside projections for the next six months, it makes sense to buy equities now as the recovery after this will be 'phenomenal'.The return on equity investment, in the next two to three years, will be fairly profitable, according to Shah..While the core business in India has been intact, the sector has been disappointing from an international standpoint, as the players bet on events, regulatory and legal outcomes, Nilesh said. Every year there is price erosion that requires constant manufacturing of new products, to take care of price decline of existing baskets. There is no clear visibility on earnings trajectory as the sector climbs a difficult uphill slope for its earnings to compound, he said.The opportunity lays in companies that are dominantly established in India or are looking at branching out in other emerging markets instead of the U.S. or Europe, Shah said..Of the five 'Cs' of infrastructure, Shah prefers:Capital Goods: The segment of companies making machinery, compressors, transformers, pumps, motors is the strongest among the five in terms of cash flows, capital efficiency and competitive advantage.Consumables: Industrial consumables.Components: Companies that provide small or big components to capital goods or industrial consumables.The other two segments include contractors and cement, which is Shah's least preferred theme as it depends on a myriad of external factors such as oil and gas and coal prices, and transportation costs..IT services are expected to experience headwinds as growth remains sedated with deflating earnings-growth rate, Shah said. However, tier-two IT companies are the ones that need to be examined for investment, as they come with better business models, new leaderships, higher future growth-rates and reasonable valuations.IT services will be a market performer at best. The opportunity will lie in tier-two, teir-three, mid to small cap stocks from investment stand point, he said. .It's time to be constructive on the space despite dicey valuations, Shah said, referring to new-age technology-backed companies.

Nilesh Shah's Top Investment Themes In A Year Of Challenges

He recommends a broad-based portfolio because of emerging opportunities across diverse sectors.

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