Raamdeo Agrawal: Lower returns from debt driving retail investors into equities: Raamdeo Agrawal – Blue Barrows

India is looking like a peaceful place to be in because of the uncertainties elsewhere, said Raamdeo Agrawal, chairman of . In an interview with Nishanth Vasudevan on the sidelines of its global investor summit, Agrawal said Indian equities are expensive compared to emerging markets. Edited excerpts:

What is your assessment of the current strength in the market despite so many uncertainties?

In the short term, the demand-supply equation is determined by foreign investors (FIIs), retail investors, and fresh issuances of companies. Because of the correction in the market, issuances went down. So, supply has been limited, while demand for retail investors through SIPs has been strong. FIIs remain the big swing factor. After selling for nine months, they suddenly stopped selling. More so, they are buying these days. So, we have a situation where FIIs and domestic investors want to buy, while the new issuances market is not yet buoyant. So, if the market goes up further from here, IPO markets will become active again and supply will start coming in.

Theories like decoupling have resurfaced because of India’s recent outperformance. Do you agree?

I haven’t seen a situation like this where India is trading in such contrast to the rest of the emerging markets. It looks like we are getting cut off from the EM basket. But I think it will be a short-term phenomenon. We all are interdependent and part of the same global village. There is also a lot of anticipation over India’s likely inclusion in JP Morgan’s bond index. The rupee is stable because of expectations of the initial $30 billion flows.

What explains retail investors’ preference for equities despite interest rates rising?

In earlier cycles, interest rates in a rising cycle used to be 8-10%. People made 9-10% returns on debt products. This time, the fixed income market seems to have collapsed. Post-tax, debt investors are still getting only 5% despite the rate hikes, while inflation is still 7%.

That’s why people are not too keen to put money in fixed deposits. Real estate remains illiquid, and people are just about getting out of some of these investments. So, a major asset class (debt) still not doing well is bringing many new people into equities. When fixed income products are coming up for maturity, many of them are choosing the stock market.

What is encouraging foreign fund managers to put money into India even at current valuations?

Indian markets are definitely expensive; they are trading at a 100% premium to the rest of the pack. FIIs are not too enthusiastic now to buy India. For them, India is just one of the markets. In India-dedicated funds, there is neither much buying nor selling. It’s the macro funds such as EM ETFs which are active now. They could end up being net sellers at any time or remain muted buyers in the short term. There could be a bigger problem for FIIs in the future. If the energetic retail investors continue buying, FIIs will face a big challenge when they decide to come back in a big way. Where is the entry point for them? That will make their position more difficult. FIIs are around 17-18% of India’s total market cap and if retail investor activity continues like this, that share will keep coming down and they will be less of a force to reckon with.

How will the rising US interest rates and a recession impact markets?

That is the only big risk for the market. Typically, India or any economy grows only when the world economy is doing well. This time around, the global environment is looking shaky. Europe is in trouble; China is having its own challenges and the US is reeling under inflation. Nobody knows how long interest rates will have to be kept higher. There is turmoil in the energy market also. So, there are a lot of uncertainties, and the global macro-economy is extremely complicated right now. Probably, that’s why India is looking like a peaceful place to be in.

You have been a long-term bull on IT stocks. When will you start looking at them again?

IT stocks could correct more because it is directly linked to what’s happening in the US. It’s better not to fight the US Fed especially when it is determined to bring down inflation to 2%. We are going to see many more shocks there. But now I am spending a lot of time researching IT. This crisis could go on for six months or even a year. Then, it will be a brilliant time to buy. I think 50-60% of the correction may be over. I prefer large-cap IT companies over smaller ones. The good part about this sector is that both large and small companies make good money. There are no loss-making tech companies.

In banks, what should be the investment strategy?

For now, we see banks and insurance companies doing well because credit growth will be good and credit costs are not too high. In banks, it’s all about scale. It’s not about margins because it’s very thin. By the time mid-sized companies gain scale, something or the other goes wrong. That said, this is a great credit cycle. Some well-managed mid-sized banks should also do well.