Normally bull markets follow a leadership. It was TMT, then it was largely a combination of commodities and infra and then some would argue good quality high ROC companies made a comeback. Right now we are staring at a big uptick in commodity and cyclical stocks. On the other hand, startups which are going public are in demand. This seems like a rising tide where everybody is benefiting. We have never seen something like this before.
As a fund manager the problem becomes tougher because everything is doing well and one has to say which one is doing better than the other or will do better than the others. I think that over time, the financial sector will make a bigger comeback because right now the story is that these good private sector banks are facing competition from fintechs which seem to have found some golden formula.
But just look at the number of fintechs. There are some 200 odd fintechs and the fact that a few of the fintechs that have got listed — the housing mortgage finance companies which say we use data and we lend to the unorganised guys – who do not have income tax record or a salary slip and all — are not doing that well even though they are lending to the most attractive sector.
But the fact is that over time, as you saw yesterday or the day before, the Reserve Bank of India is also saying that fintechs should be regulated. In the end, you will find that maybe we have overblown the
story not because they are not doing something good but because there are just too many of them. We have seen in many sectors like telecom and leasing companies previously which started off with many companies, but in the end, not many survived. India is not ready to handle 250 fintech companies. We will take some data and we will give money to the retailer and we will give money to a guy who wants to pay in three months instead of one month. The whole country cannot do that.
There are just too many of those companies and in the end, I do not think investors will make a lot of money and few will again win in the end. So the listed financial sector may over time have less pressure if it is found that regulations are being done for fintechs because that changes their model completely. So do not write off the current financials. We do not believe everything about the new. The old ones who are adapting and can compete and are agile will also surprise.
There are two indicators of the canary in the coal mine scenario in the market. One is the activity in the IPO market and the second retail participation. They both are at peak. Do you think the retail investor this time is different purely because of technology and he is much more sophisticated than what we have seen in the previous cycles?
No, I do not think that they are different because the fund managers of previous time at least themselves were also technologically proficient and were thinking and putting thought across but they also lost money. We all lost money in tens or hundreds of companies. The idea here is that currently they are believing that equity markets will make very high returns.
In the end they will be disappointed and they will learn that to know the market they have to pay an education fee, there is no free learning. Maybe the average retail guy is smarter than the average retail guy before because now he has an internet and an app, but an average retailer now is not smarter than an average fund manager of the ‘90s and the average fund manager of the ‘90s also lost lots of money.
The impression of the new crowd is that because I invested in March 2020 or April 2020, I am a hero because when the world was falling apart, I knew. I see on Twitter that when I say that the returns will be 15-18%, they all say ha, ha, we made 30%, we made 40%, not realising we are talking about longer term returns and not returns from 2020 May or June or whatever. So I think they will be disappointed.
By the way, in the US, the price of Robinhood stock has fallen a lot; enrollment of new clients and number of new accounts opened is also down a lot. It may be 60-70% down in terms of new clients coming on board. All that will happen here also because everything in the world is the same — plus, minus a few months.
Where do you see a combination of decent growth and decent price in this market?
The reason I do not buy value is because value should have a trigger. In the past, people lost money because they would buy a value stock and hope that somebody would unlock it. Though today we see some shareholder activism in India, in the 90s, I realised that individual fund managers or investors are unwilling to take on strong corporates because the corporates have political connections, police connections and no individual has the energy to fight. People preferred to sell and move on. You could not take the corporates to court, you could not change management, you could not do anything.
Even today it still looks like a very complicated way to make money. So if there is a value unlocking somewhere, we do not mind looking at it even if it is not immediate. But broadly you see that there is somebody trying to unlock the value because we are not going to make that effort. We are too lazy to write letters to managements and then take them to NCLT and all that. We have better things to do.
So today in terms of value, look at the financial sector and see what has been the earnings growth or the valuation premium today relative to what it was three years and five years and 10 years ago for the same companies. It does not look like it is anywhere near a high. Look at HDFC Bank or Kotak Bank or even ICICI Bank and just go back and say what were they trading at five years ago, 10 years ago. It does not look materially different.
What looks materially different number one, is the consumer type companies which were trading a 25-30 PE. Of course, somebody will come and say PE does not matter — which is ridiculous. But if you say it was 2-30 and now it is 80, you know that something has been rerated for some story.
If you look at the tech sector, it looks higher in terms of valuations and in terms of excitement about future growth. But for the moment they are generally in their business boom period and therefore we are letting it be. But relative valuations have not been pumped up beyond just the earnings growth that you have had over the last many years for the financial sector.
On a scale of 1 to 10, do you think by the time this bull market ends in one year, two years or three years, we could go close to 1,00,000 on the Sensex?
One lakh means you want to make 66% more, 60,000 to 100,000 is 66% more. In theory you are supposed to get there in three, four years compounding at 15% or whatever. You can ask Mr Raamdeo Agrawal who wrote a 200,000 target with an expected return of 15% per annum, but it can happen. It can happen because if you make 15% per annum for four years, it does not look that exciting to the world. If I say your index will be one lakh they say wow, even thought it might be a little lower than 15%. So maybe that is the right way to say it. So, possible, very possible. Why should we not expect 15% kind of return for three or four years?
It can easily happen, it is just that it would not happen evenly and that is the reason why equity markets do not give consistent returns but they give higher returns over time. If you got both consistency and higher returns, nobody would be putting money anywhere else.
This market has spoilt us. We have not seen a correction. Do you think a correction should come in, that it is necessary and healthy?
So a correction is defined as 10% and a bear market is defined as 20%. 10% fall in an index is actually not so painless. It is quite painful because then some of the stocks fall 15-20%. If I have to wish, what I would want is that the index falls slowly or does not go up till the end of the year more than 3-5%% here or there and we get a time correction.
But I think a 5-10% correction is possible anytime, 10% plus makes it look a bit serious so I am not expecting that right away, at least till the end of the year.
Also, the last quarter of the year is normally the best quarter in the world and also in the US. In India also, Ridham Desai had written a report on the returns from 30th October to Budget day which was at that time Feb end and now it is Feb 1. This period is generally a good period for Indian markets and also for US markets maybe because of the excitement about the last quarter sales or because expected allocation from the big guys who may be allocating once a year like pension funds and all who rebalance.
In India, I am not expecting it right now, let us not wish for it. Let us not spoil our holiday festive season with these crazy stories of big corrections.
