MC Exclusive: Valuation risk, not AI or tariffs, is the biggest threat to markets says Unifi Capital’s Maran Govindasamy

markets

In a special Diwali Blockbuster edition of The Wealth Formula with N Mahalakshmi, Maran Govindasamy, founder of Unifi Capital, said investors are overestimating global risks like tariffs and artificial intelligence while ignoring the biggest domestic threat to markets — valuation risk.

“We don’t make year-to-year market predictions because risks don’t arrive in a defined manner,” Govindasamy said. “The risk that plays out next year could be one no one is even talking about today.”

According to him, while there are multiple risk factors in the system, the disproportionate focus on global narratives — such as trade tariffs or AI disruption — is misplaced. “These are not the primary risks for our economy or domestic markets,” he said. “The real risk lies in valuations. Valuation risk can cause far greater harm to a large number of new investors than any of the risks being discussed.”

Govindasamy noted that discussions around global macro issues occupy “ten times the airtime” of valuation risks, even though price matters far more to returns. “We need to be conscious of what risks are relevant to us and avoid over-generalizing,” he said.

He estimated that 15–20 percent of the market is genuinely cheap, though those stocks are avoided because of near-term earnings concerns. Another 20–25 percent is fairly priced — “neither cheap nor expensive, trading roughly where they were three or four years ago.” The remaining 50–60 percent of the market, however, sits at valuations that “may not generate any meaningful return” and could even “cause harm to investors who’ve entered in the last one or two years.”

Large portions of new domestic inflows, he cautioned, are chasing this overvalued segment. “The impact from P/E contraction is the real threat,” he said. “You could have bought Infosys in 2001 and broken even only in 2014. Nothing was wrong with the company or its earnings — it was just the price you paid.”

He pointed to Hindustan Unilever as another example: “Until a few months ago, HUL’s price was where it was in March 2020. The index moved from 8,000 to 25,000, but as a shareholder, you made nothing in five years. It’s not about the company — it’s about valuation.”

That, he said, is the biggest concern today — not global headlines, but the prices investors are willing to pay.

Besides, when asked whether mutual fund investors — whose money is now driving much of the market’s momentum — might be disappointed, Govindasamy said that possibility cannot be ruled out.

“More than half the investors in equity mutual funds have a holding period of less than two years,” he said. “If I’m a mutual fund manager, I have to perform within two years or I lose the customer. Even if I beat the index, it won’t matter if investors exit before they see the results.”

Given that short-term performance pressure, fund managers are forced to invest in sectors driving index performance — “whether they like them or not.”

“They’re doing what’s within the dharma of mutual funds,” Govindasamy said. “But the investor experience could be vastly different in the coming year.”

For Govindasamy, valuation compression is the risk hiding in plain sight — one that could hurt recent investors far more than macro shocks or technology disruptions. “It’s not about the company,” he said. “It’s about the price you pay.”