When we started the year, the general view and that is your house view, was that one can expect 10% to 12% return. You got in three months what you had expected to get in a full year. So are you going to ride or are you going to book my profits? Do you have to change your prediction or book profits?
We have done some analysis and frankly, that view does not change. We have done some analysis. If you take the last 25 years, every three years, the market forms a new high and every three years, it also forms a low and that is always higher than the previous three years’ low. Basically it is a little up compared to the previous years and keeps moving up like that. So, one has to catch up with the earnings as well. But from an investor’s point of view, 12-15% is the expectation that one should have in equities by simple mathematics which is normal GDP plus risk premium.
So, do not redeem your units.
Yes, that does not change. We will have to just stick to that. Whenever the market gives high returns, we should feel happy to get the one-time bonus. Not necessarily, it will get repeated all the time.
Are you bracing for a fall?
Every market goes through a consolidation phase. In the last two years, the Nifty and Sensex remained more or less flat. At the same time, certain sectors did extremely well. We saw a huge divergence in terms of sectoral performance. Whole of last year, IT as a sector gave negative returns and performed substantially lower than the index itself.
If you look at both index outperformance and underperformance, there are huge deviations and it is coming on the back of the increased breadth and depth in the market, making for volatility. From money managers’ point of view on construction of a portfolio, we will have some winners and losers but from an expectation point of view, the 12-15% expectation should always remain as far as equities concern even if you go by the historical standards.
What about IT? Do you think the worst of the price damage is behind us?
I think the balance sheets are strong. The companies are sitting on huge amounts of cash and this still remains relevant from the global outsourcing point of view. There is an example of Infosys winning huge orders now. It is all a reflection of the role that they all play in the international market in the IT and technology space.
Ultimately, everywhere the valuation will catch up. Market punished them for a variety of reasons. AI has come and definitely it pulled up certain sectors globally. We will see its consolidation phase. There is a different school of thought that exists. Unfortunately, major Indian IT companies have also made their course corrections in the last few years. After the IT fall of 1999, most companies have changed their business model in such a manner that they remain relevant throughout the period given there is a role they play. If you go by that strong balance sheet, the ability of the companies to buy back shares, give a high dividend payout, and adaptability – should definitely help IT companies to come back on the radar.
So, for the moment, which to your mind is the most overrated sector and the most underrated sector?
The banking and financial service sectors have run up quite a lot and on the basis of expected growth, etc – and I am not saying they are overrated – it probably has to go through some kind of consolidation phase. Second, in the auto sector, some of the stocks have run up quite a lot on expectation that growth will come. We may have to go through a consolidation phase.
At the same time, there are certain sectors which are getting impacted because of exports not growing up to the mark like textiles. I have seen a complete decline in the last two-three years because the global markets are not being conducive enough for them to make money. This got hammered so much, that somewhere down the line, we will see some kind of pickup coming in. I think it is a mix. It is very difficult to point out on any specific, pure fundamental basis. I am going by the market, the way the market rewards and punishes.