How investors can run with the bulls and the bears

Equities, as an asset class, surpasses other investment avenues in terms of returns over the long-term and of course ease of transaction. CNBC-TV18 caught up with Nitin Raheja, Director, AQF Advisors to find out how investors can run with the bulls and the bears.

Below is an excerpt of the interview on CNBC-TV18. For complete show, watch videos. Q: Equities doesn’t seem to lose its luster despite the many glitches and the kind of volatility that we have come to accept, possibly may be unhappily so, over the last half decade or so.
A: Absolutely. There are two things. The fascination for equities in the country is immense; everybody is lured by the whole fact that equities can sometimes make quick money for you and it is also lured by what your neighbour has done depending on what you have heard in the party. But at the same time it has also been a very challenging asset class because it has not scaled up.
Even today after many years equities account for under 5 percent of the incremental savings every year that go into of Indians as such. So it has not been able to really move and mind you in the early 90s it used to be at as high as 10 percent. So it has halved as such. But, yes, despite the fact that you are not seeing this, people are curious; people want to know and are always watching equities. Q: We know it has liquidity. There is better regulation, etc. How does it compared to other avenues of investment that Indians are typically fond of or inclined to?
A: You talked about liquidity; you talked about transparency and ease of getting in and out. It is clearly scores and all that. Returns if you have an extended period and it is a very simply calculation because equities is a derivative of earnings and earnings is a derivative of GDP growth as such. So the kind of returns equity provides because if your country grows at 7-8 percent and the real growth is more like 14-15 percent so to expect equities to deliver that number is not unusual. But it comes in lumpiness as such which is what really keeps investors away.
If you look at the other asset classes, like gold, gold has its fascination for Indians for years because as equity was evolving as an asset class gold was always there for Indians which acted as some sort of a social security mechanism, something which would be seeing them through bad times and so on and so forth.
Secondly, it was real estate or property as such. For most Indians owning a property was still a long way off so that aspiration for owning a property and once you own the property and traditionally most people have seen values have gone up when they take an extended period of time. So they are lured by that but what is very funny is that if they really see the appreciation of property and look at what people have made, they have actually been holding it for extended periods of time. Equities unfortunately just because there is a price which quotes everyday and as a liquidity avenue which is available, people don't seem to carry that same view as such. So, that has acted as one of the greatest deterrents for equity as an asset class. Q: You spoke about the lumpiness and we have seen plenty of that from 2008 early part to now and that volatility, that lumpiness, jumpiness to it seems to stay with us, what is the best argument that you have to offer in favour of investing in equities today because you have about almost 6,000 companies to choose from, you have derivatives where you can hedge so why would you recommend that a person come into equities at this point of time and what can be a realistic expectation?
A: Let us understand one simple thing, if you are bullish on the longer-term prospects of this country, you cannot not be bullish on equities. As I just mentioned earlier, equities is a derivative of the growth of the economy as such. You would get periods where equities overvalue themselves and periods where they undervalue themselves. Now those are shorter-term periods, those are the challenges that investors need to transcend as such because if you take an extended view of 10 years, you will yet see the kind of changes in market capitalization that companies have enjoyed have been immense as such.
Now, you had a scenario for example, when we often take - a lot of people we talk to talk about long-term, we have been there for the last five years, markets are pretty much where they are but let us not forget that prior to that, the markets had run themselves up. So they were in a euphoric lower valuation zone where you were growing at 10 percent and your earnings were growing at 20 percent. So your markets were quoting at 20 times plus earnings and so on and so forth. Now when you come down to growth numbers which have moderated, hence you have seen this whole correction. However, if you were to take a 10 year scenario when your earnings were growing at 5-6 percent, we will see that the number or the returns have yet been pretty much handsome.
Intermittently you have gold which has come in due to high volatility globally and seen gold prices move up dramatically and show up as an asset class but you step back even further, take a 15-year view, take a 20-year view and you will see equities standing right there on top.
So I think most important for an investor is to set a time horizon. My own belief is whenever you track equities on a chart, if you look at the chart in the short-term, you will see big spikes in the chart. (If you) Pull the chart a little longer-term, you will see the spikes evening themselves out. So I think managing and overcoming volatility through longer time horizon is one of the best case scenarios for an investor to invest in equities. The other thing is you have derivatives but unfortunately it is yet an involving industry in this country, knowledge levels are very low and using derivatives, it is possible to dampen volatility but I would not encourage investors to do so before they are comfortable in terms of how to use derivatives.