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It is unwise to be 70% in equities. It is really unwise unless you are extremely proficient at this game and a real pro. , Vice Chairman & Joint MD and Devina Mehra, Director & Chief Investment Strategist, First Global, in conversation with ET NOW.
A non-sophisticated investor, somebody who is looking to making a good asset allocation, do you think by and large ETFs, a combination of gold and Nifty and perhaps one or two midcap stocks can fulfill the basic needs?
Shankar Sharma: Not at all. Absolutely not. Buying two stocks will not do the job. It is one of the worst things you can do. If you have to indeed go out and buy stocks, buy at least 25 stocks not two stocks and five stocks and ten stocks. By natural selection, assuming you have done reasonable home work, you should be able to find one or two good stocks in your 25 stock list.
If you are very good, you might find five. But if you buy only five, you may not find even one. Therefore in the stock part, have at least 25 not less than that, also put some room for gold, It is a natural hedge, we all know that over time the rupee keeps depreciating barring some moderate periods of appreciation, Indians have been smart for decades and centuries.
They have hoarded gold and that has probably delivered much better risk returns on a risk adjusted basis and even equities. Have some fixed income. By and large for most people, unless you are a professional investor, equities should not be more than 30-40% of your overall asset pie chart. It is unwise to be 70% in equities. It is really unwise unless you are extremely proficient at this game and a real pro. You will become a pro only when you turn 50, I can guarantee you that.
Devina Mehra: It is necessary but not a sufficient condition. So you have to do a lot of home work and then turn 50. Then also it works.
Shankar Sharma: In the US. Sometimes I get surprised when in India people start talking about FAANG stocks. You know, the FAANG stocks are not going to perform any more. The reality is that the markets there have moved much beyond four-five stocks that dominated from 2017 up until 2020. Those have done okay but they are other stocks which have gone up between three and twenty times. So a stock like Overstock which we bought in the month of April at around $10 is today $95 and that is not a FAANG stock. So that phenomenon has changed.
In India, Reliance you can argue is no longer supposed to be valued as an oil or as a petrochemical company. There is merit to that because of the scale of transformation and you have to hand it to Mr Ambani that this is really transformational thinking.
It is not just about the money. It is also about the thought. You can no longer apply the old economy metric to what Reliance should be valued at because that to me always is wrong. We can be wrong for three or four years on valuation and as you have known me, I am not a big believer in valuation because you can justify any valuation, you can justify 100 PE, you can justify 5 PE. It is all a nonsensical number.
My view is that even though expensive in context of interest rates, you have seen interest rates really collapse in India relatively speaking. You have seen interest rates collapse globally near zero, half percent, 0.75%. When you view PE ratios in the context of interest rates, you have to be prepared to pay higher multiples because PE ratio is the exact on the other end of the seesaw as interest rates.
The lower the interest rates go, the higher the PE multiples go for the same or similar level of earnings. I am of the view that the markets globally and in India are not richly valued. They are just about okay and given the big tailwind of low interest rates, I do not see any end to this current bull market that we are in.
Devina, Shankar is making a very important point that the bull market is back and the bull market is here to stay. Do you think one should still take risk barring a little bit of volatility and can one expect double digit returns in the next three years?
Devina Mehra: Well for one I do not think anyone has got a double digit return in over three years. In fact, the interesting thing in India going back has been that if you go back five years, equity fund returns on the average have not even beaten savings account returns. If you go back 10 years, they have not beaten fixed deposit returns.
We have been a long way away from compounding in double digits. We cannot and we are not making a case for the market as a whole. This in particular is a market where you have to pick and choose and that is of course looking at only at the stock market level but the really big decision as an investor that people should look at is looking at the asset allocation so that you cannot look at equities and that too Indian equities as the single or only asset class you will be in.
If people have to take away one lesson from this, the most important lesson is equity is glamorous, it is interesting, it is fun to talk about. You go to a party and say that I told you at the last party about this stock and it is up 50% or it is up 500%. But you know on the average all the time if you are in equities does not mean that you are going to make great returns and especially on a risk adjusted basis.
2019 was a year in which you had gold going up 25% and government securities going up 15% while equities went up only some 7% odd.
This year again, gold is up another 30%, equity markets are still down about 8-9% for the year. Even within that, you see you or your fund manager or as you know a financial advisor had advised you to go out of equities last year and that is the thing to think about. That is India only but really if you look at asset allocation and this is again coming back to what we talked about in the beginning, that some of the learnings sink in a little late in life.
This is something that is there on page one of every investment book that almost all your returns will come from asset allocation and not from the security selection. Almost all means 85% to 90% whereas everybody tries to find that one multi-bagger or five multi-baggers instead of focussing on the top down level.
You have to have everything in your portfolio not just Indian equities but government and other debt. You have to consider at least at every point you will not have everything but all that has to be in your consideration set and then gold and other commodities. Most importantly, you have to look at global markets again -- equity, debt, REITS -- all of that.
The flip side to that is that it is not easy to do that because it is not good enough. Global means that you go out of India and you buy one NASDAQ etc but you are still not really out of what we call stars -- a single country, single currency, single asset risk. If you add one more country that is marginally better than having only one country but only marginally and if you look at longer term, you will see that every year really the leadership in which stock market does best in the world varies.
One year it might be Denmark. Last year, for example it was Russia which was up almost 50%, 48%, Brazil was very high and this year for the first half both of these markets were down near the bottom till at one point, when the commodity cycle turned and they started to do better. It is a very dynamic market and it actually has taken us 20 plus years to get a grip of global markets because we started doing it end of the 90s post the Asian crisis.
We know exactly how complex it is and companies there also tend to be much more complex than companies in India.
It is still fairly simple like the same old steel and autos and IT services all of which are very model-able but there it is a different matter but having said that as I said that if you really want to have a proper risk return balance in your portfolio you have to look at asset allocation and you have to look at global diversification.
It is unwise to be 70% in equities. It is really unwise unless you are extremely proficient at this game and a real pro. , Vice Chairman & Joint MD and Devina Mehra, Director & Chief Investment Strategist, First Global, in conversation with ET NOW.
A non-sophisticated investor, somebody who is looking to making a good asset allocation, do you think by and large ETFs, a combination of gold and Nifty and perhaps one or two midcap stocks can fulfill the basic needs?
Shankar Sharma: Not at all. Absolutely not. Buying two stocks will not do the job. It is one of the worst things you can do. If you have to indeed go out and buy stocks, buy at least 25 stocks not two stocks and five stocks and ten stocks. By natural selection, assuming you have done reasonable home work, you should be able to find one or two good stocks in your 25 stock list.
If you are very good, you might find five. But if you buy only five, you may not find even one. Therefore in the stock part, have at least 25 not less than that, also put some room for gold, It is a natural hedge, we all know that over time the rupee keeps depreciating barring some moderate periods of appreciation, Indians have been smart for decades and centuries.
They have hoarded gold and that has probably delivered much better risk returns on a risk adjusted basis and even equities. Have some fixed income. By and large for most people, unless you are a professional investor, equities should not be more than 30-40% of your overall asset pie chart. It is unwise to be 70% in equities. It is really unwise unless you are extremely proficient at this game and a real pro. You will become a pro only when you turn 50, I can guarantee you that.
Devina Mehra: It is necessary but not a sufficient condition. So you have to do a lot of home work and then turn 50. Then also it works.
Shankar Sharma: In the US. Sometimes I get surprised when in India people start talking about FAANG stocks. You know, the FAANG stocks are not going to perform any more. The reality is that the markets there have moved much beyond four-five stocks that dominated from 2017 up until 2020. Those have done okay but they are other stocks which have gone up between three and twenty times. So a stock like Overstock which we bought in the month of April at around $10 is today $95 and that is not a FAANG stock. So that phenomenon has changed.
In India, Reliance you can argue is no longer supposed to be valued as an oil or as a petrochemical company. There is merit to that because of the scale of transformation and you have to hand it to Mr Ambani that this is really transformational thinking.
It is not just about the money. It is also about the thought. You can no longer apply the old economy metric to what Reliance should be valued at because that to me always is wrong. We can be wrong for three or four years on valuation and as you have known me, I am not a big believer in valuation because you can justify any valuation, you can justify 100 PE, you can justify 5 PE. It is all a nonsensical number.
My view is that even though expensive in context of interest rates, you have seen interest rates really collapse in India relatively speaking. You have seen interest rates collapse globally near zero, half percent, 0.75%. When you view PE ratios in the context of interest rates, you have to be prepared to pay higher multiples because PE ratio is the exact on the other end of the seesaw as interest rates.
The lower the interest rates go, the higher the PE multiples go for the same or similar level of earnings. I am of the view that the markets globally and in India are not richly valued. They are just about okay and given the big tailwind of low interest rates, I do not see any end to this current bull market that we are in.
Devina, Shankar is making a very important point that the bull market is back and the bull market is here to stay. Do you think one should still take risk barring a little bit of volatility and can one expect double digit returns in the next three years?
Devina Mehra: Well for one I do not think anyone has got a double digit return in over three years. In fact, the interesting thing in India going back has been that if you go back five years, equity fund returns on the average have not even beaten savings account returns. If you go back 10 years, they have not beaten fixed deposit returns.
We have been a long way away from compounding in double digits. We cannot and we are not making a case for the market as a whole. This in particular is a market where you have to pick and choose and that is of course looking at only at the stock market level but the really big decision as an investor that people should look at is looking at the asset allocation so that you cannot look at equities and that too Indian equities as the single or only asset class you will be in.
If people have to take away one lesson from this, the most important lesson is equity is glamorous, it is interesting, it is fun to talk about. You go to a party and say that I told you at the last party about this stock and it is up 50% or it is up 500%. But you know on the average all the time if you are in equities does not mean that you are going to make great returns and especially on a risk adjusted basis.
2019 was a year in which you had gold going up 25% and government securities going up 15% while equities went up only some 7% odd.
This year again, gold is up another 30%, equity markets are still down about 8-9% for the year. Even within that, you see you or your fund manager or as you know a financial advisor had advised you to go out of equities last year and that is the thing to think about. That is India only but really if you look at asset allocation and this is again coming back to what we talked about in the beginning, that some of the learnings sink in a little late in life.
This is something that is there on page one of every investment book that almost all your returns will come from asset allocation and not from the security selection. Almost all means 85% to 90% whereas everybody tries to find that one multi-bagger or five multi-baggers instead of focussing on the top down level.
You have to have everything in your portfolio not just Indian equities but government and other debt. You have to consider at least at every point you will not have everything but all that has to be in your consideration set and then gold and other commodities. Most importantly, you have to look at global markets again -- equity, debt, REITS -- all of that.
The flip side to that is that it is not easy to do that because it is not good enough. Global means that you go out of India and you buy one NASDAQ etc but you are still not really out of what we call stars -- a single country, single currency, single asset risk. If you add one more country that is marginally better than having only one country but only marginally and if you look at longer term, you will see that every year really the leadership in which stock market does best in the world varies.
One year it might be Denmark. Last year, for example it was Russia which was up almost 50%, 48%, Brazil was very high and this year for the first half both of these markets were down near the bottom till at one point, when the commodity cycle turned and they started to do better. It is a very dynamic market and it actually has taken us 20 plus years to get a grip of global markets because we started doing it end of the 90s post the Asian crisis.
We know exactly how complex it is and companies there also tend to be much more complex than companies in India.
It is still fairly simple like the same old steel and autos and IT services all of which are very model-able but there it is a different matter but having said that as I said that if you really want to have a proper risk return balance in your portfolio you have to look at asset allocation and you have to look at global diversification.