Prashant Khemka on Valuations at PMS AIF World Summit 2021

Session: Steering Portfolio towards continued wealth creation through the paths crowded with high valuations
Speaker: Prashant Khemka | Founder, White Oak Capital Management
Date & Time: 5^th Feb 2021; 02:40 PM to 03:10 PM

Mr. Prashant Khemka is the founder of White Oak Capital Management. His content and opinions during the entire flow of talk were that from the perspective of Team White Oak and could be different from the general perspective.

He started with valuations and mentioned that markets as a whole are fairly valued at any given point of time and even if not, it is not possible to conclude if they are overvalued or undervalued. Being able to know when to “enter” the market is basically timing the market, which is next to impossible.

Just like any project or asset’s value is determined by the Present Value (PV) of its future Cashflows (CFs), similarly, the value of any market index at any given point of time is nothing but the PV of the future CFs of its constituents. Keeping this in mind, the two factors that play an important role are the CFs into perpetuity and the discount rate, both of which are co-related, globally. He very logically explained why interest rates have gone down today over the course of the last 4 decades (courtesy: inflation expectancy is also going down) and how that has led to the increase in equity multiples, leading to higher valuations.

Inflation expectancy stands heavily on two pillars: commodity inflation and wage inflation. With the advancement in technology (starting from the growth of Personal Computers to the invention of mobile phones to the era of the internet), productivity has increased tremendously and both commodity, as well as wage inflation, have been witnessing a downwards slope, which means “inflation expectations may remain subdued for a long period of time,” and equity multiples may remain alleviated.

Moving forward, looking at the markets as being fairly valued, to generate the highest possible returns, the pre-requisite is to have a “Focused Investment Culture.” This implies that at White Oak, they believe in a strong stock selection process (Great biz. + Attractive (relative) Valuations) rather than “betting on macros.” For the portfolio construction, at White OAK Capital Management, they believe in having a good balance of pro-cyclicals (Financials, Real Estate, etc) and counter-cyclical companies (Staples, Pharma, etc). Having a good balance of companies in the portfolio does not only help generate returns and outperform the markets over the cycles but also delivers great performance consistently even during sub-segments of the cycle.