Over the last couple of months investors have been caught between news flows that have kept the market volatile. Kalpen Parekh, MD & CEO, DSP Mutual Fund told Sandeep Singh that while investors wait for clarity to emerge, the quick response from Indian policymakers to negative events, over the last 5-7 years, has not only provided structural tailwind to the economy but has also given confidence to both domestic and global investors. He added that investors should not worry about the current events as none of this would matter in the long-term. Edited Excerpts:
Currently, the market is witnessing both positive and negative pulls. Where does the balance lie and where are we headed?
There are both pros and cons. On the one side, there are data points that make me anxious, such as world growth slowing down, liquidity coming down because of Fed rate hike and the low cost of capital that supported higher equity valuations has started rising.
On the other hand we know that the government, over the last 5-7 years, has done a lot of things in terms of giving structural tailwind to the economy.
So, while we may go through cycles where the economy and markets boom and then slow down, these cycles have been crunched, because for every negative event, the response from our policymakers has been very quick. Even during Covid when there were concerns, there were quick measures by the RBI and the government and so, as a country, we are bouncing back much faster for all the temporary cyclical problems that we face. That gives inherent confidence that eventually things are only going to improve.
So, would you say the political stability in India is providing the confidence?
Money doesn’t come for political reasons but it does come for stability reasons. So as long as policy making is stable, rules and regulations are fair, objective and stable, and there are inherent drivers of growth in the economy, it gives confidence to global capital and domestic investors too. Various classes of investors are coming for different reasons. One pool is seeing that the economy will do well and profits will grow; the second is driven by personal finance needs; and the global money is more nuanced deriving comfort from strong policymaking, stable government, relatively stable currency, and size of market that can absorb large capital. I think there are a lot of positive tick marks to give confidence for flows and to think of India as a long-term destination and every correction is a good opportunity to add.
What gives you the confidence to stay put?
The confidence is coming from data and not just perception. There is a very large domestic market in India because of our large population, profile of population and demography and that shows that India should continue to grow at healthy rate, relative to the world for a reasonably long period.
And if that happens, then there are enough entrepreneurs and businesses that will grow their profits at 10-15 per cent CAGR. It’s a no brainer to invest in equities as an asset class and over long periods of time compounding is in your favour. Personally, my approach to investing is more basic and so it is the need that I have to retain and increase my purchasing power and the best way to do that is to own businesses: invest through MFs (mutual funds).
In our discussions, we see a lot of optimism among various companies as they are planning future investments. Are you seeing the green shoots?
The government has taken several small steps over the last few years which are structurally setting the reason to invest in the Indian economy or markets. So it is not one but a series of steps — PLIs, incentives given to manufacturers, lower corporate tax. All these are long-term measures and the benefits are going to last longer. This is showing up in small pockets and the trend is only going to accelerate over a period of time, which gives reason for optimism. Also after a long period of time, credit growth is in double-digit and banks are lending.
So two-three trends are coming up — capacity utilisation is going up, consolidation is happening in some sectors so they are taking loans to acquire and scale up, and in some sectors retail loans are going up. So, I think it is a holistic growth that we are seeing and that is a good early green-shoots in terms of how the economic cycle would start.
What are the challenges?
The only challenge I see is that everyone is positive and that is reflecting in stock prices. The valuations are higher by 15-20 per cent. However, I would tell the investors that they should not be too focussed on current events as none of this will matter 20 years from now when you retire and when the cost of living and healthcare would be higher.
The only way you can beat those costs is by partnering with these companies or investing in them. A very safe fixed income instrument is safe in the near-term, but risky in the long-term because it doesn’t even cover the cost of inflation. On the other hand, investing in equities is unsafe in the short-term but is much more safe in the long-term because history and evidence shows that they are able to grow your purchasing power.
Do you see things improving for companies this festive season?
Over the last three quarters, there have been two challenges.
First is the input cost that has risen, and then the slowdown in consumer demand because with inflation, the disposable income has come down.
I think the second one will take some time to get solved, but the first one has already seen some softening as the oil and commodity prices have come down. So, margins for many companies across several sectors will normalise and many good companies would benefit in the next few quarters. From demand perspective though, we still have to wait for more data points to validate.