The market has managed to climb a wall of worry despite what is happening on the medical front, inflation, etc.
Global central banks have proved that they are much more important than anybody else. The amount of money that they have pumped in after 2008 has ensured that markets are in a good shape. Retail investors also started getting interested in stocks at the right time. A combination of global central banks and retail interest in stock markets led us to this superb rally all the way from March 2020. It will continue till the time the global central banks want this party to end.
If they (central banks) do not want the party to end, will the equity market continue to surge?
Look at the alternatives before an investor. Interest rates are far too low. The reality is that the global central banks set interest rates. In the western world, they have taken interest rates to zero. If you talk to all my classmates who are now sitting in the US, they are saying what to do with the money if the interest rates are zero. So it is a trap that only the global central banks can solve.
We keep telling people that in an inflationary environment, earnings will come. Inflation is the output price for companies. If the output price goes up for steel or sugar or copper or oil, earnings are going to come. So you are not going to have such a big problem on earnings like you had in 2013 to 2020 when output prices fell. You have a situation where the central banks want the party to keep going on.
In India, the credit growth is at the bottom, which means that things have to improve. The current account deficit is low. India is not fragile like (what it was in) 2013. The corporate profits to GDP ratio is low, which means that it has to go up. The capex cycle has not picked up yet and even the Indian central bank has been dovish. So clearly it is the central banks who have to spoil the party. If they do not want to spoil the party, I do not think there is any way in which the markets can suddenly come down other than some geopolitical war or something like that.
You understand market cycles very deeply. Where are we right now?
As an investor of other people’s money, we have to be much more careful. We looked at other all-time highs in 1999, 2007 and even 2017 and found that people did not practice asset allocation, which means investing across debt, equity and other asset classes.
The second mistake that people made in all those all-time highs was to chose a narrow field in which money was being made. In 1999, it was TMT, that is technology, media and telecom stocks. In 2007, it was infrastructure stocks; in 2017, it was smallcap stocks.
We came to a conclusion that what you can do is always recommend asset allocation, which is investing in equity and debt. The second is to do an investment in everything, and not just a narrow area. When you invest in a narrow area, there are a lot of risks.
Having said that, investing at an all-time high requires much more caution than investing in March 2020 when the market was going down by 10% in a day.
Today, even if people give us money, we have to invest much more carefully. Hopefully, we will be able to handle the time when the US increases interest rates. We are cautious now.
You are a top-down investor. How is the picture looking like because a lot of reflation trade has already played out?
A top-down investor has very little problem. There are a number of smallcaps and midcaps which are going up every day in a very-very fast way. Some stocks with a very good long-term view in sectors like telecom, auto and financial services have not been moving.
In the all-time highs of 1999 and 2007, there were a number of quality stocks which had stopped doing well. Again today, there are a number of quality stocks which have stopped doing well. From a top-down investor point of view, what we are finding is that there are a number of stocks which have stopped doing well. One can invest in those quality stocks at this point of time. You may not get returns in the near-term because they are not the ones which are moving.
