It is a great time to invest if you want to do business in India, if you are an entrepreneur or if you are in the start-up space. But what about public market investors given that Sensex has touched 60000?
If you believe in all the things you said, then there is no question that it is also a good time to invest in the stock market or equities. The only thing is if you compare the party to what happened in the last one year, then obviously the party will not be as good but it cannot be really that different if you say entrepreneurs are doing well and foreigners are coming in and the economy is doing well.
You may say that sometimes some stocks may be discounted too much and therefore they will either not go up or may underperform but you cannot have two things going totally different ways beyond a few weeks here or there.
It is said that markets always overshoot. If this bull market has to overshoot, are we in for two-three years of maybe 20%-25% plus return before the real peak happens?
I refuse to think in that direction. If I think that the market will go up 12% or 15%, I would be as happy and bullish as anything else and if you get more than that, we will of course take it. What I mean is one should not plan for a 20% surge and invest on that basis. That is because even if you get 12-15%, your allocation should be exactly what it is.
If you thought that the returns in the beginning will be minus 10-20%, then you decide to wait for a few months. But today if you agree broadly that you will make reasonably good returns, it does not matter if you end up making much more. You are not supposed to buy a house and leverage it to invest in the market because you think the returns might be 20%! So do not think like that. Just think whether it is so out of line that you would not even get a 15% return which is the historical average and reasonably big premium over what else you can do in terms of fixed income. That is all about asset allocation.
History shows that there are big phases where one market or one particular sector does very well. It was Japan in the 70s, followed by the TMTs for the US market. Last couple of years were dominated by China. Given how growth is anaemic in other parts of the world can we say the next four-five years belong to India?
Yes, I think it can. There were two things. One is that the US has had a massive run from 2009 onwards and US returns in dollar terms are some 16-18%. I forget the exact number but they are obscenely high for the US where the average returns at longer term maybe 8%. So to get 18-20% for a long stretch of 10 odd years is very high.
India itself has actually done quite badly for the last 10 years. From 2007 December in dollar terms, the return is some 5-6% per annum. So from the previous peak, there is no real high that we have achieved and now we can see a few of these reforms coming together and the investors or foreign investors or FDI guys or private equity guys also reacting to it. And then China has shot itself in the foot. It gets three to four times the money that Indians get in terms of foreign flows. Therefore even a little bit of a reallocation from there to a similar sounding market for a foreigner would make India the most natural beneficiary.
It has not happened yet in terms of flows, maybe because there are so many things happening together that they are first protecting what they have and they are taking it out. Then there are the US issues and all that but as things stabilise, the relative attraction of India just has to go up.
It is not possible that in this time period, China will regain the confidence of the world because they are doing so many things back to back that it does not look that suddenly they are going to reverse.
Who would have thought that we could be staring at a 10-year plus bull market for US equities and the bull market is not dead yet. It is the longest bull market after second World War and it is still alive and kicking. In hindsight only we will figure out where this bull market ends. But are we in for that kind of crazy bull market in India?
That is what I am saying. Our behaviour is changing a little bit to taking even higher risks and saying that valuations do not matter and that every IPO has to be oversubscribed 400 times. I say do not do like that, do not get carried away. Do a high allocation to equity as you should if you are younger and you have the money and all that. Whatever comes, we will take and be grateful but you do not want to put a strategy on that basis.
The strategy is on the basis that equity will do better than debt, that you will not regret putting money into equity over a slightly longer time and hopefully in one-year, two-year if we get more, say thank you very much. Don’t take off by deciding we might get 30% per annum because that means you are trying to shift a guy who was not happy with a 20% return. When the fund manager or commentator or the analyst say you made 30% per annum, suddenly the guys on the margin also get excited. I do not think our market needs those kinds of people. But if it comes, we will take it.
We have outperformed in a stunning manner in September while the world came tumbling down. We are at a new high now. Will this outperformance sustain or get challenged?
Over time, I do not believe that we should outperform by this extent. This year, the Indian market must be up some 25-30% and now the US market is up 15% and China and all are down. But over three-four years, it does not look like India has outperformed at least the US.
I would think that this was a phase when fundamentals were being strongly recognised and relatively India getting some benefit even though we have not had much foreign inflows from the time the China problem came up, starting with their attack on the education sector. But maybe other markets have had massive redemptions unlike ours. It is not that we have had massive inflows. So maybe, it is the Indian fund managers and retail are pre-empting a little bit of that relative attraction of India versus other emerging markets.
But what is the Indian investor supposed to compare first? If he has to compare and say am I going to lose a lot of money because everybody knows that overtime you make a lot of money in markets, the question only is the current situation. Will I end up wasting the first two years recovering from that?
If you are saying that is okay and you will do better, then for an Indian investor, in 90% of the cases, it is only the Indian fixed income. But overall you want the globe to move together a little bit. It will be very rare like say in September when the US market was down 5% and we were up by 2%. Over time, outperformance is possible but going against the grain in terms of the rest of the world falling and us going up makes it tougher and tougher.
It is said that markets are forward looking and tend to discount the future. How much of the future are markets discounting? Are they discounting two-year forward, one-year forward or three-year forward?
Find out at how people are looking at earnings in terms of the sell side, which is the only entity that is putting down formal numbers. These guys are all looking at March ‘23 and even a little bit of March ‘24. I agree that India is doing well relative to the world and in absolute terms, maybe after a few years of false starts which got interrupted because of different events that happened in our country or economy or market. Things look a bit more smooth.
One may change a few stocks or reduce the focus on a few things. Today absolute greed and outright inconsistency with history or becoming nervous are seen in two things — IPOs and the extent of oversubscription in what looks like normal companies to me; and secondly, some investors saying that valuations do not matter in investing. These two look extreme to me.
If you look at the performance of the financial sector, it does not look like it has gone anywhere. The performance of many of the IT companies has been much better than what we may have thought two-three years ago but one can still justify it. Then there are some companies from sectors that previously were not doing well like real estate. Even something like L&T is available at some obscenely high valuations.
What is the big picture risk for an investor both time and price wise?
Right now, the assumption is that there is no prospect of a big fall. Let us look where the previous big falls have happened and what had happened prior to that. What should be the expected returns from the stock market which would make you feel comfortable? The last 25 years’ annualised average return has been 14% but there has not been a single year in these 25 years, where the returns were anywhere near 14%.
So one has to play it a little longer in terms of going in. The only way to look at it is what happened in the last one year? There can be a correction from that angle as the returns are very high. In India, the annualised returns for the last five years would be 15%; in the last three years, may be 18-20%. In the last one year, it looks higher. But people usually invest for 3-5 years.
It is this new crowd of investors who have come in last year because of lockdown or work from home and they have this feeling that you are supposed to make 30-40%. I do not think any of the older guys think that you are supposed to make a 30% annualised return. So if you reduce your expectations to reality, then it is a great market
It will be a plus minus here or there or can gradually go up but does not look like a bad time to start. Yes, it is a bad time to put everything in one shot but it is like any other normal period in life.
