How are you analysing and assessing the market environment — both global as well as local — given that we have left behind a roaring rally? Although it has got a little wobbly since last week or so, how are you assessing the market mood on the sidelines of your India conference ?
First of all, it is fair to say that if you go back to March 2020 at the start of the global pandemic, nobody could have predicted that we would be in this scenario. Even if we went to the end of 2020 after we had a significant rebound, nobody would have said one year later we are still going to be going strong. So what you have around the world is unprecedented amounts of economic and fiscal stimulus that are making money accessible. We are seeing companies raise debt at record numbers, companies profitability is as high as ever, private markets are flush with cash.
We are seeing a lot of activity and higher valuations because interest rates have gone down and people are not earning a great return on fixed income like a FD for example. They are looking for alternative sources and that is also fuelling a rally in at least equity markets. The backdrop is very positive economically but valuations obviously are not cheap anymore.
So if people are thinking about investing, today one should not be stepping into it with the expectation of earning the type of returns that one earned in the past 18 months. It is not to say that one cannot earn a positive return, but the likelihood that it is going to be matching what one has experienced is more limited.
What is the key message at your conference this year? What are the factors which you feel are important for the markets to take cognisance of?
We want to help people understand — if they are investing for the long run — what are the opportunities because it may not be the easiest environment right now as everything has gone up and everything looks somewhat more expensive than it was. We are really trying to help people understand how to go about investing. This is really a good time to assess the risks that are in the environment and understand some potential things that are on the horizon that are worth paying attention to.
Inflation has gotten a lot of headlines. But it certainly has not reached the levels that India has seen historically but it is the kind of thing that one has to be very watchful about because if it starts to move up, then it will have a very meaningful impact on return and it would not be a positive one. We want to definitely talk about the risk side of the equation even though at a time when things are going up may be fewer people want to do that.
The final point that we really want to talk about this year is the notion of stakeholder capitalism. This is something that around the world is becoming more important and you will hear it in my conversation with Nadir Godrej at our conference. There is a firm right here in India that is thinking about these issues because it really is the case that companies can do well by their shareholders as well as all the other stakeholders and deliver really great returns.
In India and elsewhere, we are starting to see this move where companies are not only feeling responsibility for the returns that they deliver to shareholders, but also for the communities that they are part of and the impact that they are having in the long run on those communities and countries.
In turn investors are starting to ask questions about what it means for their future as well. It is not a coincidence that in many parts of the world, for some of the companies, the highest valuations have moved towards a positive ESG stand.
We have seen a world beating rally in India I think. Some people are asking whether it is on account of the unprecedented levels of liquidity or if it is also the element of fundamentals? Of course, earnings are playing out. How do you read the situation?
I do not think so, I think there are some good underlying reasons for it; liquidity is certainly a big factor but liquidity has also created really strong performance in a lot of companies. So, it is a very important factor as well. The earnings multiple of companies have gone up because the quality of earnings that companies are demonstrating is much higher than it was pre-pandemic.
While the rally has been significant and while markets are not cheap, it is also hard to argue that the reasons why they have gone up are not the right reasons. It is not a low quality rally. But certainly, there are some pockets where some speculation has started. When one looks at high quality companies that are generating earnings, one sees some meaningful growth there and I would stay away from some of the mean stocks that are brought on news. Stick to the quality names because they are doing very well.
What is the feedback from FII fund managers on the reforms of the Indian government and the recovery in earnings?
I think India remains a good long term investment for a lot of foreign investors. In the emerging market funds, the allocation for India has gone up to about 10% from almost 8% and that is a sign the people are moving in a positive direction. I will say that the pace of reform in India is always something that people debate and relative to other countries, perhaps some of the pace of reforms have not matched the ambitions. That sometimes slows down the level of enthusiasm for investing in India.
ET Now: What are your thoughts on the economic expansion and does this look durable? More importantly, would you say that we are in a much more sturdy shape now if at all, taper were to begin?
Kunal Kapoor: Yes, I think so. There are always risks. Even back in March and April in India, the Delta variant of the coronavirus had started to impact the economic picture. It is really hard to predict what that trajectory could look like and what that impact would come if something where to happen in that context. So, that is a known unknown.
But beyond that, just some of the pure actual economic moves in the consistent move towards liberalising the economy starting to emphasise the private sector in the right spots. India is definitely stronger than it was a decade ago. With the caveat that I do not think a significant amount of inflation is not going to be easy whether in India or elsewhere and that could have a very meaningful impact and not a positive one.
