A number of brokerages, including Morgan Stanley and Goldman Sachs, have downgraded Indian equities on valuations. What do you think of the valuations?
I think if you look at the way we are looking at things around the world, India by no measure is cheap. But one can also argue that Indian equities have always traded at a premium, potentially because the market has grown faster. So, if your question is—is India significantly overvalued—should you be underweighting? Then our view is generally, India is not extremely cheap, it continues to be a reasonable long-term place to have money, and the biggest risk that we see is around investor expectations. And it’s not a risk that is unique to India, but the reality is, we have been in a phase where the markets have provided very strong returns. As you know, it’s highly unlikely that these types of returns are going to repeat. That doesn’t mean one will have bad returns; but it means that if an investor is coming to make a fast buck, then that can be a problem, and so, for India it’s positive that so many individuals are being interested, but it’s key for them to know that there will be ups and downs, and that they have an opportunity to build wealth by doing it over time and not by making a quick return only.
You have been overweight on Japan and Europe since 2019, but the US has continued to power ahead through tech stocks. Has your perspective changed?
We continue to think that Europe in particular is very cheap. If you look at it from a valuation perspective then relative to other parts of the world, there are lots of companies that look attractive, and so, when we underweight, or overweight, it varies based on what our expected future returns are, and Europe has underperformed meaningfully. So, we think that there is a likelihood of higher annualized returns in the forthcoming period, of vis-à-vis what we have been through, and so, that’s how we look at it. I will say that, in retrospect, everyone has been surprised at the strong policy response in the US that has really unleashed that market, and Europe has certainly been a little more cautious in its policy response, but they have caught up and are trying to develop their markets as well. And from a valuation perspective, you would understand how we would think that expected future returns are higher there. And I would say that, (in the) US too, we would continue to favour value-oriented investments because they have underperformed meaningfully, and look relatively cheap compared to their growth and outputs.
With rate hikes being imminent across the world, what are the prospects for debt investors?
If I had to count the number of people that said that rate hikes are imminent for the last 16 years, then we’ll have a lot of losers, and so, it just points to the fact that it’s difficult to predict when interest rates actually move.
Part of what you are saying is with respect to where they are in the developed markets and they can only go up, right? And so, they will, eventually. And when that happens, it’s obviously a difficult outcome for those who are definitely fixed income investors, because the tailwind that they enjoy from lower rates which drive up the total return will disappear. There are alternatives even within fixed income, such as corporate debt, that investors can do well in. The important thing is if you are an investor, you shouldn’t think about taking your fixed income into equities or risk-bearing asset classes. At the end of the day, there’s a reason those asset classes are there—it’s sometimes to de-risk the portfolio, somewhere to drive returns.
When you say alternative liquid asset classes, what do they encompass?
What it does entail is what we are seeing a lot of today, that is, private equity. And, in private equity, money is locked up for multiple periods, so there’s no liquidity in that sort of asset classes. Liquid alternatives are essentially different kinds of strategies that in total are not necessarily used in traditional fixed income or traditional equity, but giving you through strategies that are available through merger arbitrages (that people use, that are relatively common), but has a fixed amount of assets that go into it; those kind of things, that people are using options and futures to create exposures. These tend to be very institutional strategies that are turning to be downmarket. In India, they are not so popular, so you might not have seen them, or they have not arrived just yet.
The other fear that’s in the minds of most investors, or most individuals, is that of inflation. What should people do to protect themselves from inflation?
I’m a big believer in not trying to build a portfolio on macroeconomic shortcomings. I think very few people look in through that successfully, and the reality is that most professional predictors and watchers of markets are usually not right in these types of things, and my advice is to build a portfolio that is sensible to you as an investor, and to stick to it for the long run. That means, occasionally, it’s going to look much worse than you would like things to be, and you would have things look much better than they are; but the point is that with time, you get to the right results, and what I would worry about what I want to do, what outcome I want. With that being said, in inflationary period, stocks tend to be one asset class, so I could see a situation where people could add a little more to equities, but I would not overdo it.
What’s your view on crypto?
Put me in the basket of sceptics. I think most investors are just fine without it in their portfolios.
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