Nikhil Kamath, the co-founder of Zerodha and alternative asset management firm TrueBeacon, is buying gold and lots of it. The fund manager has already accumulated gold to the tune of 15 percent of the fund’s portfolio as he looks to hedge against the rising threat of inflation.
Kamath’s vote of confidence for gold as an inflation hedge runs against the current trend where global institutional and retail investors have been buying Bitcoin to protect themselves against runaway inflation.
“Gold, in my mind, will become cool when cryptocurrencies become uncool. There has been a big crash in cryptos, and if that crash were to speed up I think gold will suddenly start becoming more attractive again,” Kamath told Moneycontrol in an interview.
Kamath also talked up the case for the government to rationalize taxation on dividends, securities transactions, and equity derivatives.
Edited excerpts:
We have seen a very rangebound market over the past three months with bouts of selling pressure. Are you comfortable dipping into the market at this level?
I would say not yet, especially, when it comes to companies that are correcting a lot like Zomato, Nykaa, Paytm, and the rest. From the very beginning, their valuations did not make sense. I've been pointing out for a long time that buying companies, which are loss-making at 1,000 times and 1,500 times multiples, is not sustainable. Even at current valuations, I don't see where the rationale is to enter these stocks.
The markets are still priced to perfection, and ahead of the Budget and the inflation worries we have at hand, probably it is still not the right time to enter. And when you look at the correction, it's tiny, right? It feels like a big one but for a market that has rallied 100 percent, a 3-4 percent correction is nothing in my mind.
So do you hope to see more downside from here to be comfortable on the valuation front?
I think so. When you look at the actual numbers, our GDP lot less than it was in 2018-19. We are in a bad situation. So for the market to have rallied so much more than where we were even before the pandemic, doesn't make sense to me. I remain fairly circumspect on the market, I have been for a long time now. In our funds, we are about 50 percent hedged.
The Budget is around the corner. What would you expect will the overarching theme be for the government this time around?
The current government is fairly opportunistic and they're good with their timing. I wouldn't be surprised if they're reworking the Budget based on how sentiment has changed over the last fortnight. Some big things that I think should happen are like dividend distribution tax being rationalized. As a corporate today, if you're a promoter, you pay 25 percent tax on the profit, and then if you get dividends, you pay an additional 43 percent as dividend distribution tax, which takes the net tax rate to 53-54 percent. I don't think that is conducive for the ecosystem, something should definitely be done there.
We've been asking for the last 10-15 years that something should be done about STT (securities transaction tax). It is not a tax on income, but attacks transactions. This is a big hindrance to attracting foreign capital into India. We need the markets to be deeper, and removing STT will bring down the impact cost significantly. Doing something like that will actually bring in more revenue for the government.
The third thing would be taxation on derivatives. I still don't understand why derivatives are taxed at the maximum tax rate because derivatives are meant to hedge risk. It’s very discouraging especially when it comes to category III AIF funds that do not have pass-through taxation. Category III funds bring in a lot of money into the capital markets, both domestic and foreign, maybe around Rs. 50,000 crore in the last year and a half. Even though it is a product just like a mutual fund, it is not taxed like a mutual fund. I think that is a problem, category III AIFs should be taxed like other AIFs.
There is a lot of talk around the rural economy slowing down. Demand at the aggregate level seems to be falling behind other aspects of the economy. How do you tread this scenario as a fund manager?
This might be a bad thing to say, but the rural economy is going to move towards aggregation as it has in the West and other countries. Smaller farms will go away, they will aggregate and become larger farms. I think the key here is to how to help farmers that will no longer have a job. For that, the government requires a lot of resources. The basic problem in our country is that for a country with the population and the wealth that we have, only 3 percent pay any reasonable amount of tax. Is that because 97 percent of the country does not earn money? No! It does. It's the most ridiculous thing. Property taxes should be increased because if somebody owns an expensive home even if it was bought through not the cleanest of means, at least you're taxing them upfront. I think things like that have to be done. Tax on farm income above a certain threshold, property taxes, inheritance tax, all of this will give the government money to then take care of the rural population and improve infrastructure.
I can say a bunch of things that the government could do to aid demand but where does it get the money to do it? From a portfolio perspective then, you do avoid consumption as a theme for the time being given the slack that we are seeing on the demand side of things
There is an argument that in high-interest rate environment value counters could do well. Are you looking at some of these spaces like energy, utility, and metals?
I'm looking at commodities. Gold is a big thing for me. In the last six months, I've been adding a lot of gold to my portfolio. It has gone up to around 15 percent of the overall portfolio now. Gold has proved itself to be a good hedge against inflation. Also gold, in my mind, will become cool when cryptocurrencies become uncool. There has been a big crash in cryptos, and if that crash were to speed up I think gold will suddenly start becoming more attractive again.
There is another segment of the market where the hype is very high and that is the entire green energy space. Do you feel that probably there is a need for caution on the part of investors?
Yeah, you know, it sounds silly, but I blame the media. None of these stories are researched. Nobody puts in the work to report what is actually going on. When it comes to EVs, I think, a lot has to be kept in mind. Sure, we are selling electric vehicles, but are we still producing electricity in our country by burning coal and losing 50 percent of that electricity by the time it will reach the electric car to charge it. The way the EV story is being sold, I don't think that is true. I have a feeling traditional energy resources like coal will become interesting in the near future because people have ignored it in the last few years in terms of investment. You can already see that with crude oil prices rallying, I think the same thing will happen for other energy commodities like coal.
Given the subdued start to the year, what's your outlook for the remainder of 2022 for the Indian market?
I, personally, find these rallies where the market goes up 40-50 percent to be bad for the ecosystem. They go up fast, and they come down faster. I would be much happier with a market that is slowly trending upwards, rising 7-8 percent every year. I hope after a correction, whenever the next big one will happen, we go back to reasonable valuations. I hope we start trending like that and avoid bubbles because bubbles do not help anybody. They hurt the retail investor much more than anybody else.
