The biggest risk is around investor expectations

Dec 02, 2021

A number of brokerages, including Morgan Stanley and Goldman Sachs, have downgraded Indian equities on valuations.

Neil Borate at Mint, spoke to Morningstar's chief executive officer Kunal Kapoor. Below are some excerpts from the conversation.

  • Europe

We continue to think that Europe in particular is very cheap. If you look at it from a valuation perspective then relative to other parts of the world, there are lots of companies that look attractive, and so, when we underweight, or overweight, it varies based on what our expected future returns are, and Europe has underperformed meaningfully. So, we think that there is a likelihood of higher annualized returns in the forthcoming period, of vis-à-vis what we have been through, and so, that’s how we look at it.

  • United States

In the U.S., we continue to favour value-oriented investments because they have underperformed meaningfully, and look relatively cheap compared to their growth and outputs.

  • India

If you look at the way we are looking at things around the world, India by no measure is cheap. But one can also argue that Indian equities have always traded at a premium, potentially because the market has grown faster.

If the question is—is India significantly overvalued?, then our view is generally, India is not extremely cheap, but it continues to be a reasonable long-term place to have money.

  • The biggest risk is around investor expectations.

It’s not a risk that is unique to India. The reality is that we have been in a phase where the markets have provided very strong returns. It’s highly unlikely that these types of returns are going to repeat. That doesn’t mean one will have bad returns; but it means that if an investor is coming to make a fast buck, then that can be a problem.

For India, it’s positive that so many individuals are interested, but it’s key for them to know that there will be ups and downs, and that they have an opportunity to build wealth by doing it over time and not by making a quick return only.

  • Interest rates hikes. Inflation. 

I’m a big believer in not trying to build a portfolio on macroeconomic shortcomings. I think very few people look in through that successfully, and the reality is that most professional predictors and watchers of markets are usually not right in these types of things

If I had to count the number of people that said that rate hikes are imminent for the last 16 years, then we’ll have a lot of losers. It just points to the fact that it’s difficult to predict when interest rates actually move. Part of what you are saying is with respect to where they are in the developed markets and they can only go up. And so, they will, eventually. And when that happens, it’s obviously a difficult outcome for those who are definitely fixed income investors, because the tailwind that they enjoy from lower rates which drive up the total return will disappear. There are alternatives even within fixed income, such as corporate debt, that investors can do well in.

  • Advice to investors.  

Investors shouldn’t think about taking their fixed income allocation into equities or risk-bearing asset classes. At the end of the day, there’s a reason those asset classes are there—it’s sometimes to de-risk the portfolio, somewhere to drive returns.

Investors should build a portfolio that is sensible to their profile and situation, and to stick to it for the long run. That means, occasionally, it’s going to look much worse than you would like things to be, and you would have things look much better than they are; but the point is that with time, you get to the right results, and what I would worry about what I want to do, what outcome I want.

In inflationary periods, stocks tend to be one asset class, so I could see a situation where people could add a little more to equities, but I would not overdo it.

  • Crypto

Put me in the basket of sceptics. I think most investors are just fine without it in their portfolios.

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ninan joseph
Dec 4 2021 12:55 PM
At the end of the day, there’s a reason those asset classes are there—it’s sometimes to de-risk the portfolio, somewhere to drive returns.

The best advice, I have read after a very long time. Yes, these assets are there for a reason. Hope investors understand this. They will when there is a relatively higher crash which makes investors to sell at distress.
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