The index is expensive relative to where the fundamentals are today. For retail investors, it probably is not the best time to be buying it now, Nikhil Kamath, who's a co-Founder and CIO, True Beacon and Zerodha said in an interview with Moneycontrol’s Kshitij Anand.
edited excerpts:
Q) A volatile year is coming to an end but investors will be happy as the portfolio which were in deep red say back in March or April has now recovered and are profitable. How are you viewing markets at current levels? Time to put in money or book profits?
A) I think the ferocity of the rally has been significant. We get why some businesses are doing well and others are not performing as well. But, to gauge whether the businesses which have done well have made up for the ones performing badly is very hard to call.
A lot of the current consumption is on the back of pent-up demand. And once this pent up demand is through, I think it'll be interesting to watch in the March quarter, what actually happens with NPA, what happens after this short burst is over.
Focusing on the inherent economy and fundamentals might be a better metric to gauge what the market should be trading at.
Because at a 36, 37 price multiple the index is three standard deviations away from the mean, it's probably the most expensive we have seen it in over a decade or two.
So, the index is expensive relative to where the fundamentals are today. And, if I were to be recommending a decision to retail investors that probably not the best time to be buying it now.
If you wait, these things are cyclical and there are corrections periodically. You should be able to get it at a more reasonable valuation, if one were to wait, I think.
A) It looks like it will continue. We’re seeing a lot of talk about how businesses are moving even from China to India in terms of securing supply chains etc.
How long it will continue will be determined by how much the government does in shoring up infra and kind of like making us more competitive amongst the peer countries in the region.
I hope it continues. There is definitely an appetite for emerging markets across the world today and more so for India, if not for any other reason people perceive the scale of the economy is correlated to the population of the country. And, I think a lot of interest is there around that.
But, a correction is a part for the course today because it's all too heated, everything is too expensive. And I think we need this, we need some semblance of reality to kick in the right assortment.
Q) Is FoMo driving the market especially in the small & midcaps or is there something
A) No. I think liquidity is abundant across the world. And, we see this trickling down into India as well. Outside of liquidity, the other asset classes or the other avenues available to a retail investor have kind of dried up.
The interest rate cycles have been on the way down. People don't really get much out of putting money in bank FDs anymore. Real Estate has largely underperformed over a decade.
I think all of these factors are also something that can be attributed to why there is so much interest in the equity markets today? But, one piece of advice to any retail guy coming into the market today is, just go back in time and look at history.
Most of what will happen tomorrow has happened in the past, in another cycle, in another manner. And buying when valuations are this expensive, typically hasn't worked out if you look at a 20, 30, 40 year time period.
Q) What is your outlook for the year 2021?
A) I think it'll be range-bound, hopefully correcting between 5% to 10% to come to a more normalized level, that along with earnings, if they slowed down in the first quarter of the next financial year, I think should bring the markets back to the 12,000 to 12,700-12, 800 kind of levels, at least.
Q) Key lessons from the year 2020?
A) Yeah, so markets periodically teach people many lessons, I think, more so than anything, I think, to be on the side of momentum is very important.
We can all stay rational, but we can't stay rational and remain solvent for a long period of time if we're burning into our cash corpus every day.
So stick to the side of momentum, but do it with hedges in place, so you don't have naked market risk. I would recommend people who have not diversified up until now, please go out there and diversify, not just between sectors and stocks, but also between different asset classes.
I think it would be prudent for everybody to have an allocation to some kind of a fixed-income instrument without any underlying risk.
This gives you liquidity when you most need it to have a reasonable amount of diversification between fixed income, equity, real estate, and every other asset class that is available to you will only make your portfolio a bit stronger.
Don't be too fixated upon one company, one sector, one trajectory, because often these change very, very quickly.
Q) Which sectors are likely to hog the limelight in the year 2021?
A) IT and pharma will typically do well when volatility comes by. And, if one prediction I can make at this point of time, while things are so expensive is one way or another there will be volatility over the next year.
Based on that premise, I would say IT and pharma might be the decent places to hide.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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