In an interview with ETMarkets, Hajra said: “Unlike China, India has a balanced mix of domestic consumption and savings. From being the world’s 13th largest consumer market 20 years ago, India is now the world’s 7th largest consumer market” Edited excerpts:
Market seems to be consolidating after hitting record highs. What is your take on markets?
Equity markets are notoriously volatile in the short term. Trying to predict market levels in the short term is akin to flipping a coin. As a result, I would refrain from attempting to forecast market levels in the near term.
According to our analysis, there are five major factors that will determine the market’s direction in the medium to long term.
Four of these five factors, namely macro fundamentals, corporate fundamentals, money flow into the equity market from domestic sources, and money flow into the equity market from foreign sources, all support a positive outlook for the Indian equity market over the next year and a half.
The only factor that could cause concern right now is the valuation of Indian equities, especially in the light of earnings over the last 12 months and market momentum.
To summarise, we have a positive medium to long-term outlook for the Indian equity market, but we do not rule out relatively minor corrections or a period of market consolidation in the near term.
What is your take on RBI rate action?
Inflation is clearly a concern for the RBI. The upward revision of the inflation estimate, the continued liquidity withdrawal stance of monetary policy, and the raising of the incremental CRR during the August 2023 monetary policy announcement all attest to this.
While the RBI may have had hints about the sharp increase in retail inflation during July 2023 at the time of the monetary policy announcement, either the magnitude of the jump was not anticipated, or the RBI views the spike as purely transitory.As a result, if the elevated level of retail inflation persists, it will be extremely difficult for the RBI not to raise the policy rate by at least a symbolic 25 basis points (bps) or to undertake an outright increase in CRR.
At the very least, a rate cut by the RBI in the next 12 months appears unlikely unless growth falters in an unexpected way.
Any new age companies which you think could turn out to be the growth engines of the future?
India is making concerted efforts to advance in a variety of new-age technologies ranging from green energy to next-generation semiconductors, drones to artificial intelligence.
While each of these areas has enormous potential to transform the country and become growth engines, we are particularly optimistic about India’s experiments with digital payment systems using various technologies.
India’s technology stack in this area is already gaining international acclaim and is transforming various aspects of the economy, businesses, and consumers.
We believe that this is the most promising technology initiative and that it will play a significant role in transforming India’s growth process and distribution system.
There are numerous companies that are making important headways and I do not want to pick winners here.
SIP contributions surpassed Rs 15000 cr and new SIPs are getting registered every month. This gives D-Street enough ammunition at times when FIIs are selling. Do you think it showcases retail investors are here for the long haul?
For all investors, equities are the most appealing broad asset class. Since 2000, Indian equities have produced the highest dollar returns among all systemically important countries for investment horizons ranging from one to twenty years.
While equity as an asset class is volatile in the short-term and thus poses risk to short-term investors, the risks associated with equities are not significantly different from those associated with other asset classes such as bonds, real estate, or gold over longer investment horizons, i.e., three years and above.
Despite this, Indian households have traditionally made very little investment in equities and related assets. Until recently, Indian households’ portfolio allocation was well below 5% for equities.
This anomaly is being addressed as financial literacy rises, and Indian households are realigning their portfolios to include a greater allocation to equities. As a result, we believe this is a structural trend and Indian households would continue to increase their allocation to equity assets.
What would you advise to investors who are waiting on the sidelines to put in fresh money?
We believe that timing the financial market is extremely difficult, and that consistently timing the market is nearly impossible.
Perhaps more importantly, numerous research studies show that across countries, strategic asset allocation determines over 90% of portfolio return, with individual instruments within a specific asset class and asset purchase timing playing minor roles in portfolio return.
Our own research shows that whether one invests in the equity market at an all-time high or after up to a 30% correction, portfolio returns for the next 12 or 36 months, on an average, do not differ significantly.
Not only is it difficult to time the market, but even if one can, the impact of timing on the portfolio is minimal.
As a result, our advice to investors waiting on the sidelines for a market correction is to deploy their money in the market, perhaps in a staggered fashion.
The opportunity cost of not investing in the market is much higher than the potential cost of capital loss due to relatively minor market corrections that may or may not occur in the near term.
A Motilal Oswal survey highlighted the growing attraction of Index Funds or ETFs. Why is retail money flowing into these funds – is it simplicity or they are being promoted like that?
According to our data analysis, corporates are investing significantly more in ETF and index funds than retail investors. We believe that the risk of such investments is comparable to that of investing in the debt market, but the returns are much higher for ETFs and index funds than for debt funds.
We see this as primarily a change in corporate treasury management strategy. While investing in ETF or index funds, instead of choosing between passively and actively managed equity mutual funds, corporates are influenced by the risk-return profile of debt versus equity funds.
ETFs and index funds, by definition, generate the same level of return as the benchmark index while exhibiting comparable volatility (beta) as the index.
Since 2009, actively managed mutual funds, on the other hand, on an average, have generated up to 3% excess return over benchmark indices with lower volatility versus the index.
The expense ratio differences between ETFs and actively managed funds are more than offset by the actively managed funds’ higher returns and lower volatility.
This is why actively managed mutual funds continue to be more popular among retail and high-net-worth investors than ETFs or index funds.
Most global organization have suggested that India will double its GDP probably by the close of 2030. Do you think consumption will be a big theme that could produce multibaggers along with infra?
Household income or GDP for the country can be used for either consumption or savings. A country with a high savings rate has a low level of consumption.
The country must invest a large portion of its savings domestically or money will flow out of the country as capital outflow (export). Countries with high savings rates, such as China, have made massive investments in export-oriented industries, construction, and real estate.
However, as the country is now realising, there are limits to how much exports or real estate investment can be promoted. At this point, the country’s future growth faces significant challenges.
Unlike China, India has a balanced mix of domestic consumption and savings. From being the world’s 13th largest consumer market 20 years ago, India is now the world’s 7th largest consumer market, with one of the highest per capita consumption growth rates.
Consumer-oriented industries have bright prospects, thanks to a strong GDP growth rate and a high rate of domestic consumption. As India’s per capita income rises, the share of the wallet is shifting from goods to services.
Spending on services such as education, healthcare, entertainment, hospitality, and travel, as well as certain consumer durables, is rapidly increasing.
As a result, consumption is a major theme, and the niches mentioned above are particularly intriguing and have the potential to yield several multibaggers.
Any sector which you think is in the overbought zone? Which is the most undervalued pocket in the market?
We believe that certain companies in the auto industry, as well as some segments of infrastructure, construction, and real estate, have run up more than their current fundamentals and near-term outlooks can support, making them vulnerable to a possible correction.
In contrast, several companies in the information technology and pharmaceutical sectors appear to be undervalued in relation to their current and near-term fundamentals.
What is your take on the recent IPOs which hit D-St? There is a frenzy but it is not the same as we saw last year or the year before. What are your view and any company you are looking forward to?
Primary insurance is typically attracted by a strong secondary market rally. This time is no different. However, this time around, investors are more optimistic about IPOs than they were in 2021.
New age companies dominated the IPO market in 2021. These businesses are notoriously difficult to value. Furthermore, many of these were treated as concept stocks, which resulted in significant investor euphoria.
In the post-pandemic world, disruptive and technology-intensive companies were attracting a lot of investor attention.
In 2021, corporate earnings upgrades were just getting started, so growth rather than valuation was the primary focus.
This time around, investors’ valuation concerns are much higher, and thus IPO companies are unlikely to command the kind of premium valuation that prevailed last time around.
Indeed, this time around, investors are looking at IPOs as a better value than existing listed companies.
As a result, the nature of the IPO frenzy in 2021 and 2023 will be very different. While I do not want to name specific IPO companies, I believe there are several interesting lineups in both the old and new economies.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)