Indian market in very expensive territory; retail investors must not pile on more risk: Nikhil Kamath

What do you put this enthusiasm down to? Is it a broader understanding that at the end of the day returns are to be made from the markets because your other investments are not giving those kinds of returns and are not even able to beat inflation?
Well, it is really hard to discern and kind of point at one thing. On paper, pragmatically, the higher interest rates, unemployment and slowing growth across the world should affect India as well but we seem to be relatively decoupled from most of the world, both emerging and developed world. You could look at it both ways — you could look at it glass half empty or half full; one good way to look at it would be the consistency in India and the foresight that we have had in policy decisions in many ways might be playing out today. A lot more people are interested and optimistic about India today than they have been in the past.

The India story seems to be the narrative right now at least. We are better off than the rest, while the UK is now officially in a recession, we know that the US is grappling with decades-high inflation, we also have high inflation but the narrative seems to be that we are the bright spot in the world even at 6-7% growth. Do you think that is actually percolating down to the retail investor level as well?
Retail is a small segment of the market. Overall, when you look at it in terms of the open positions that exist, I would say retail impacts the market to a factor of maybe 10% but not more than that. What promoters are doing, how much foreign money is coming into the country, how much capex the government is taking on, these things typically move the market a lot more.

One fairly noticeable trend in the last couple of months is that FIIs for a long time were selling and they seem to have reversed. They have started coming back and investing again.

You cannot really point out one thing but maybe it is a culmination of things. How young we are and how underpenetrated many industries are might have something to do with the money coming in as well.

China story played out a bit in the markets on Friday on hopes that some of those Covid restrictions will be lifted, and things will ease up there. Is that a big factor to watch out for?
Well even when things do open up in China, sentimentally the damage is done. Most large companies, even because of the geopolitical tensions in the world, seem to be looking for a hedge against China and India for many reasons seems to be that hedge today. And hopefully, that will be another tailwind in making Indian markets do better but just from a valuation point and from a relative standpoint most parts of the world have corrected a good 30-40% and India is 3% away from all-time highs. Even from a price multiple standpoint, we are in the expensive territory today. If you were to map historically how well Indian markets have done and let us say use something like a Buffett indicator and map market cap to the earnings, I feel we sit in very expensive territory. I would say maybe like 85% of how expensive we were at the peak. So, it is a scary place to be.

One has to also wonder does it make sense for a foreign investor who is agnostic to the region to reduce allocation and enter Nasdaq for example where valuations seem to have gotten a lot more reasonable now today. So, people will have to kind of wait and watch out for how these events play out.

On your Twitter timeline, you have very interesting comments on the real estate sector. Real estate, which is an old favourite of Indians as an investment piece, you are saying is also going to get tough, EMIs are going up and valuations are not matching up. So, then what is looking interesting?
To be candid, I think I am a fairly pessimistic guy and very conservative in the way I invest. Of all the asset classes that are available today, real estate looks least attractive to me outside of the fact of the demographics — populations becoming older, fertility rates dropping, interest rates going up significantly and likely to in the near future. If Fed is raising, then invariably, we will have to raise as well.

One big factor which people do not account for when buying real estate is the illiquid nature of the asset with debt, fixed income, equities, gold. Of these asset classes, tomorrow me and 10 of my colleagues or the people I have around me, we can all liquidate together and we will probably be fine. But when one tries to do that with real estate, the problem is a lot more acute and in that the illiquidity really kicks in very quickly.

We have not had such a situation in a long time. One could argue that ever since India opened in the 1990s, real estate has seen a one-way bull run; the last decade might have not been spectacular but prices have only trended upwards. You know we do not have the hindsight of corrections in real estate which has happened elsewhere in the world like 2008 or if you go back in time to the 60s or the late 20s. So, the Indian mentality of our diaspora very much believes that real estate as an asset class can never fall in value. Even if you talk to real estate developers, a lot of them will tell you that real estate has never gone down and it will probably never go down at any point in time and they continue to rise.

You do not like real estate, it is the least attractive but you are saying it has trended consistently upwards and it is not going to go down so?
I am saying people believe it will not go down and that makes it scarier as an investment class because when you have 100 investors investing in one asset class believing it can never go down, the day it corrects, I think that correction will not be minute, it will be very drastic.

Overall, what would be your outlook as we move on to the end of this calendar year? We are pretty much where we started — with Russia-Ukraine still looming large, energy impact still there throughout the world and a lot of major nations in the world prepping for a recession in 2023, India may be relatively better placed. How would you look at it going ahead? Is your pessimist self coming out more or your optimist self?
Well if one were to be a chart reader, I think May, June, July, August, September tend to be the dull periods and you know everybody has a Santa Claus value leading up to December. So, you know ensuing Diwali as well; that is one way to look at it. Inflation in real estate for me is a much bigger factor than people are giving. I do not think people are giving inflation the attention that it warrants. Typically, the only tool we have against inflation is raising interest rates to a point where it is above inflation in the hopes of containing it. Historically, inflation cycles have not been multi-quarter but multiyear. These are things which last for many years at a time.

If you go back in time maybe you look at the Federal Reserve under Volcker and interest rates at one point were as high as 17-18% even. If interest rates go up 30-40% higher from where we are today, maybe another 200-250 bps, there could be many problems across the industry. Many sectors in India are fairly levered and servicing that interest could eat into their margins. We will have repercussions for stock prices across the board. While I am saying all this, let me be

and again compliment India on the strength that it is portraying; I do not mean to paint such a negative picture but I think retail investors have to be cognisant of this situation globally and also be cognisant to the fact that we have held up in a world which has corrected significantly. And maybe now is not the time to be piling on more risk. It is time to diversify and secure some of your gains and get into safer asset classes as a hedge.

The flip side of rising interest rates and business hates it, industry hates it, but it is great for savers — you know the good old deposits which also the average Indian loves. Do you think that helps at all or it is just all wiped out with inflation?
I think if the interest rates were significantly higher than inflation that argument might hold true but in the current scenario, we are still lagging inflation and in my own view we are lagging it significantly. So, I do not think that will hold true today.