The Hindu Business Line : `We are already starting to see lower ROE in many sectors'

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Kolkata Jan. 21 The current environment, marked by extreme volatility, requires investors to show even greater discipline while investing in equities, argues Mr Rushabh Sheth of Karma Capital Advisors.

Excerpts.

The results season is mid-way. How do you react to the results that have come so far?

The corporate sector seems to be continuing its strong growth traction in the third quarter reporting season up till now. The growth is distributed across sectors though big IT companies have once again led the growth pack. The earning growth has actually accelerated in fiscal 2007 as compared to fiscal 2006. The main reason seems to be higher consumptions spends and increasing momentum in the capex cycle.

Growth, we believe, should continue - although at a more moderate pace - as we start to see the emergence of some head winds. As the capital expenditure cycle matures (with higher interest rates), there will not only be an impact on capital efficiency but also on rate of returns.

We are already starting to see lower ROE in many sectors and this trend is likely to spread as companies invest to cope with higher growth.

Recent days have seen enormous volatility. How should investors behave in a situation like this?

The markets saw remarkable volatility in the past year. We believe that the environment will continue to be challenging in the near term. We would like to reiterate that the current environment requires investors to show even greater discipline while investing in equities. It is imperative that any equity investment has to be made with a long term time horizon and in a systematic manner keeping in mind the end objective of the investor.

It is not possible for investors to time the market. They should take a more gradual approach to any incremental investing at this point of time.

Is any sector likely to see a major re-rating? How about the areas that did not quite perform well in 2006?

We believe in bottom up investing with an absolute return focus. Our philosophy is based on conserving and building wealth over longer time frames and across market cycles. We look for ideas across sectors and believe that even now there are opportunities across sectors. Typically we find that a greater bunching up of our investment ideas in sectors which are temporarily out of favour and are therefore contrarian in nature. To give you an example, we like companies that will benefit from lower commodity/oil prices. These companies have taken a big hit to their profitability due to higher commodity prices and these benefits should start to manifest themselves over the next few quarters. Investors should be wary of sectors that have stretched valuations and poor or negative cash flows.

What are Karma Capital's broad plans? How are you positioning it at the moment?

Karma Capital is exclusively focused on providing discretionary portfolio management and advisory services. Our main objective is to manage money based on an absolute return focus with a view to building clients' wealth over longer time frames. We are in the process of expanding our product basket in the discretionary portfolio management space.

We also offer advisory services to multi manager investment solutions providers like OptiMix. This is a division of ING Investment Management.

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