Interview :: Equities to again outperform other assets in a few years: Sandesh Kirkire, Kotak AMC

Sanket Dhanorkar, ET Bureau Feb 24, 2014, 08.00AM IST

Stressing on long-term wealth creation and optimistic about India Inc’s growth, Sandesh Kirkire, CEO, Kotak AMC, advises investment in equity as it is likely to give the best returns in a few years’ time. Here are excerpts from his interview with ET.

Investors are still shying away from the equity market. Are they likely to miss out on good opportunities?

Investors have to understand that markets tend to give lumpy returns. There may be no returns for 3-5 years and, suddenly, the market will give phenomenal returns in one year. There is no way of telling which that year is, so you need to stay invested in the market. Suppose you invest at the peak of the market every year for 15 years, and then the market crashes. Now if you had stayed invested throughout this period, you would still have got an 11 per cent post-tax return. This means that it is just about the time spent in the market rather than timing the market.

The problem is none of us knows when the market is going to go up. The fund managers have done a good job of producing consistent alpha, but the investor has to understand that we are alpha managers, not absolute return managers. Kotak 50, which completed 15 years recently, has grown almost 15 times in as many years. On the other hand, how many people have remained invested from the start? Hardly a few. They are moving in and out regularly. One has to realise that longevity brings wealth; wealth creation is a long-term process.

What can investors do to take away some of the underlying risk?

It’s a given that the markets will surprise you. The only thing we can control as investors is our asset allocation, and maintaining it is of paramount importance. It is essentially a control over greed and fear. So, if you had decided to allocate 50 per cent to equity in 2005, it would have grown to 80 per cent by 2008. What should have been the approach at that time? We should have sold equity, but we were doing the exact opposite. Greed had taken over. How do you control greed and fear? The only way is through asset allocation. This involves rebalancing every few years. If you see a sharp change, rebalance it. If you follow the basic principles of asset allocation, you will not lose.

When do you expect the investment cycle to turn around?

The market is hoping for a stable government. The efforts of the present government in the past six months to clear stuck projects will lead to jump starting activity and, hence, job creation. Ultimately, the slowdown is because we are not bringing in new consumers to the market, which will happen through new jobs. Jobs will help start the investment cycle. We simply cannot have manufacturing growing at a rate lower than that of agriculture. Kickstarting manufacturing will solve many issues. India has been one of the most wellmanaged emerging markets over the past six months.

We hiked rates at the right time. We have now closed down our current account deficit to a large extent. Exports are doing well. We have acted decisively. What we need now is a stable government to take things forward. Once this happens, earnings growth will improve and the market will start looking at re-rating when earnings growth enters high double digits.

Does the recent interest rate hike threaten to take the economy in another direction?

Interest rate is just one of the factors of production; it’s not the only one. We also need to look at rates from the perspective of savers moving away from financial assets. Despite the economy boasting a 30 per cent savings rate, the financial market savings rate was hardly 8 per cent. This means that the investor found it better to be outside the financial markets and buy hard assets. This is what led to the demand for gold. This has to change and investors should get a real return.

The RBI’s message is clear: if we manage the CPI well, consumption will grow. The RBI has merely realigned the rates to this philosophy. Is this going to hamper growth? A hike will not. Banks are not hiking their lending rates, so the cost of borrowing for companies will not rise. It is just that the central bank is aligning itself to the CPI targeting, which at this juncture is not anti-growth.

Do you still believe India can revert to the earlier growth trajectory?

We are talking about 5-5.5 per cent growth through 2014-15. This year it will be slightly under 5 per cent, a rock-bottom rate for India. I am confident about growth coming back. We need it because it would lead to higher taxation, which will lower fiscal deficit and, in turn, would create better spending and uplift the masses. Hence, it is inevitable that we go back to 6-7 per cent.

I am not sure about achieving this kind of rate at the current level of inflation and interest rates. For the economy to grow, inflation has to fall; you cannot have high inflation, high interest rate and high growth. This combination just cannot work. Once inflation comes off, it will increase the possibility of softening and drive growth. So, there are various other issues involved, not just interest rates.

What mix of mutual funds would be appropriate for investors at this juncture?

Every investor has different needs and, hence, varying investment horizons. Each asset class has a risk attached to it and one mitigates this through a judicious investment horizon. Typically, equities are a riskier asset class than debt, but over the long term, the former have been found to produce a significant alpha over debt or inflation. At this juncture, the economy seems to be bottoming out. While equity has been volatile, the index has remained stagnant over the past few years. The equity return over the past five years has been above 15 per cent, perhaps the best among all asset classes.

I expect the economy to recover over the next few quarters and the market is trading lower than the long-term valuation. So, equity should again outperform other assets in the next few years. All financial surpluses that an investor does not need for the next five years or more could be invested in equity.

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