EU may disintegrate, gear up for end of capitalism as we knew it: Manish Chokhani

In a chat with ET Now, Akash Prakash, Amansa Capital & Manish Chokhani, Enam Holdings, says put a substantial chunk of your money in financials. Edited excerpts

ET Now: The Brexit referendum is around the corner. The markets are volatile globally and at home. What do you think the impact is going to be on Europe and the global economy as a whole?



Akash Prakash: It is a genuine risk, if it does happen. The risk is really that the potential disintegration of Europe which we thought would happen with Greece exiting but which never happened, may actually happen if the UK decides to not to be part of the common market. Tomorrow Netherlands may say and then Germany and X, Y, Z may say so. It's like opening a Pandora’s box. The question is what will be the new avatar under which the European Union will function going forward? So I think the real worry on Brexit is not so much just an impact on UK which is of course there but is it the beginning of the disintegration of Europe which is a much bigger deal that is right.

Manish Chokhani: I mean UK as a economy frankly is not that bigger deal for the world, it is really implications on financial markets which and how things get disrupted and are there dislocations from time to time. He is right I mean the European experiment in some sense has failed. It is a matter of time before it will unravel now whether it should have unravel four years ago, whether it will unravel in the next four years. The fact is all these economies are old, mature, demographics are bad and therefore they would not get the growth which they have been used to. They cannot remain at the standard of living they are used to and in that you end up becoming more and more tribal that kill the immigrant, stop someone else from coming in, fearing the new guy will get his job. What used to become a movement towards centralisation and becoming large is becoming a movement towards let me at least guard my own turf and my own house and forget the rest. It is happening across the world. When you see elections in the US, the rise of Donald Trump is really suggesting something similar over there as well. States in the US have already starting having those conversations so it is a generic move in the world back towards socialism that kind of electric voting.

ET Now: Is it the end of capitalism?

Manish Chokhani: It is not the end of capitalism because you still have the nationalists coming up but capitalism the way we know it, the Anglo-Saxon way, is under attack including in the US. There is this 2, 3, 4, 5 per cent rich guys in the world. They are not the ones who go and vote. The votes are coming from somewhere else. So it is an interesting period of churn where the old leadership has to transition out, new leadership has to emerge. In India, it looks like the new leadership is already there. Certainly Prime Minister Modi is one of the tallest leaders in the world today. So we have the characteristics of getting up there but as in any transition when UK handed over leadership to the US earlier in last century it was not without pain. So it would not be without pain in this century as well.

ET Now: The way you invest is that you always look at businesses which are going through a temporary slowdown, where markets have mispriced growth, where perception is beaten down and the ability of the business brings the business back right up. So where is the mispricing in this market and where are the great businesses that are suffering because of cycle or because of other factors?

Akash Prakash: Well this market is tough now because the problem is that there has been a big move to quality. So all of us have learnt the hard way that in India especially, have to invest in quality businesses and franchises. I think the problem today is any company which has a good track record of quality and profitability is very expensive. So by and large the well known ones are off the radar. So you have to go where either your perception of the quality is different from the markets so in a business which has mediocre returns in the past but if something is changing or management is changing, you have to grasp it, So it is a more challenging market. I still remain quite optimistic on the market in India but to come down to specific stocks is a challenge. You can still find pockets and you buy five-six companies, yes; but can you deploy large chunks of capital? No. Even in those five-six companies, you have to be a little bit away from the standard. It is not going to be in the standard numbers. So I do not get into specific names because frankly some stuff we may be buying right now.

ET Now: You have talked about some stuff on the previous show like Federal Bank, Mahindra & Mahindra Finance?

Akash Prakash: Federal Bank we talked about. Hopefully, we are right. Federal is exactly a situation which we think is undergoing transformation. The market thought so six years ago. The transformation did not happen, markets got frustrated and gave up. We think that the transformation is going on now. They have done additional things and they have had some bad luck. If we are right we will do very well. If we are wrong, we will lose some money but the downside is limited. That is a classic case where we are taking a different view because our time horizon is different and people are tired and fed up there.

ET Now: But some of your outsized bets which have done well for you are Chola, Mahindra & Mahindra Financials. So are you picking your spots in the NBFC space because PSU banks are vacating lots of pockets. They do not want to get into a lot of pockets and Indians want financing in those pockets?

Akash Prakash: Yes, our thesis has been that Indian financials is an extraordinary opportunity. I think Manish has alluded to this right and by simple equation, economy will grow at 12-13 per cent nominal GDP, credit penetration is low. So credit will grow 15 to 17 per cent for the system. 70 per cnt of your banks which have PSUs cannot lend beyond 7-8 per cent. That means any financial institution which is well capitalised has a comparative cost of funds and can underwrite and originate in a proper risk adjusted fashion can grow at 25 per cent. That is why we have been so positive on all this stuff and they have all actually done well.

ET Now: Apart from buying private banks and which are a play on technology, a play on talent, a play on reach, how else one can participate in Indian financials because that is the meaty part of the market?

Manish Chokhani: Lots of things are there. Housing finance, for example, is a whole big area. We have stocks like say Bajaj Finance. In consumer finance area, you have equipment finance, the Shrirams and the Sundarams of the world; you now have the microfinance sector which is really in euphoric stage currently. So it is just going to keep expanding and like I said today I think 30 per cent of our indices are way towards financials. The composition of that will change, it is not like this will become 50 per cent but it is not like 30 per cent of the market weight will go to 20 per cent either. So it is the best place to stay to have a substantial chunk of your money. We may have slight dissonance or disagreement today on tech. Our tech shares have got beaten up a bit unfairly because they are projecting 10 per cent growth. They are in a cusp of transformation and there is reengineering happening there because with the use of AI and tools like that, you would not need so many people. So there is a case for margin expansion which some of the CEOs have alluded to.