Over the last few months equity markets have been in a correction phase. With large caps falling around 14 per cent and small and midcaps even more, investors, especially new investors who only saw markets move up over the last four years, will surely be worried. Industry veteran Kalpen Parekh says the current correction is normal given the huge upmove and that investors will have to be patient for some more time. In an interview with THE WEEK, the MD and CEO of DSP Mutual Fund, shares his thoughts on navigating through the volatility, what should investors do and where and how gold fits in.
In the last 3-4 years, markets surged, investors poured in, in droves, and a lot of froth got built up. How are you seeing things now that we have had a correction in the past few months?
Almost for the last 15-18 months, we have been flagging off that revenue growth has moved to single digit. Last year, earnings growth was still double digits because there was margin expansion. But once revenue growth starts slowing down, eventually, historically we have seen that even profit growth also narrows down because businesses never operate linearly.
There will always be cycles, margin cycles, revenue growth cycles, profit growth cycles, which is a part of any natural economic cycle. The valuations were not reflecting the slowing revenue growth and the likely slowdown in profitability. That was our worry, which is why we have remained reasonably cautious or prudent in our recommendations, in the launch of our funds, in the focus of what type of funds should we promote or not promote.
We feel one year back, markets were expensive, today they are less expensive. I will not say they are very cheap, they are less expensive and it is always a gradual process of transition. We have seen the large-cap indices lower by 14 per cent and the small and mid-cap indices have fallen by around 20 per cent. But just prior to that we had seen a 200-300 per cent price move between 2021-24.
So, I think this is a process of normalizing. Prices fall, prices stagnate and gradually earnings come back. Earnings will come back. Within that cycle, there are pockets where we feel valuations are more reasonable. We allocate more capital in those sectors where they have run up very sharply.
Markets are doing what they are supposed to do legitimately. Investors have to do what they are supposed to do, which is invest with discipline, prudence and awareness that higher returns are not our birthright every month. Higher returns will come with higher volatility and fluctuation and we are going through that right now.
What will it then take for the markets to rebound? There are obviously a lot of domestic and international factors at play at this point in time.
Normally when markets reach a certain price point and when companies or stocks become attractive or they start showing enough value, notwithstanding bad news, money will find its way wherever there is value. So, one is, once pockets of market start coming at a price which is reasonable or cheap, automatically money will get adjusted from the more frothy part of the market.
The second point is, if 6-12 months back, we were not worried about the India story, why are we worried suddenly in 6 months? In good times we grow at 7 per cent. The mistake is we extrapolate at 7 that we will grow faster and then we come at 6 per cent, then we again get afraid. I think 6-7 percent GDP growth rate is our long-term natural range of growth.
As long as we acknowledge that and design our portfolios around that, we should be fine. So, 6-7 per cent broad long-term growth rate is our cornerstone of being positive about our economy and on top of it, good companies generate 12-14 per cent profit growth rate. In the last 30 years we have had multiple economic cycles, business cycles, global challenges. Our long-term profit growth rate has been around 12 per cent. So, over time we will mean revert to that.
Global investors have gone out, they will come back at a price. The currency also has depreciated. So, the re-entry in a way is at fair price at a currency level as well as at a stock market level.
Every 3-4 years there are these type of 15-30 per cent price corrections. We will have to live with some period of consolidation and be patient about it.
There is a lot of uncertainty right now around President Trump and his policies, the dollar continues to strengthen... How are you navigating the challenges?
I have been in this industry since 1998, there is not a single day on which I had decisive clarity. If I look back at these 26 years, every day there was something which was a reason of uncertainty, reason of worry. These are uncertain policy decisions that can happen in the next few quarters, which can have significant impact on economies as well as profitability of companies or choice of sectors. It's something that we will wait and watch. India will get affected, but to some extent, India's contribution in terms of global exports is relatively much smaller. You have bigger countries who will have bigger problems.
Our focus is to look for companies who will be able to find their way out, build their business model in such a way that they adjust to the new realities. How should we as investors deal with this is, if there is higher degree of uncertainty, but if valuations are cheap, don't worry because valuations have already discounted that uncertainty. If not yet, start with hybrid funds where the fund will itself have 30-50 per cent still in bonds or arbitrage where it is earning a safer 7-8 per cent return and as more clarity emerges, it can rebalance to stocks.
As investors, you don't have to look at mutual funds only from an equity lens. There are 40 products today which are available. Depending on what is your market view, risk appetite and time horizon, you can mix and match. Our largest fund collection in the last 18 months, for example, has been a multi-asset fund. It is a roughly Rs 3,000 crore fund from scratch. It has 45 per cent lying in bonds and gold. It has done exceedingly well. So, today with this correction, we can now gradually book some bit of gold and start buying stocks, which we feel have corrected a lot more. It has 20 per cent in global stocks.
So, at any point in time, there are opportunities to build a safety net in the portfolio at the same time have a growth component of the portfolio. Every fund house has options like this. So, I would only urge readers to keep an open mind and not be married to one approach of investing. Personalize your approach.
What is your view on gold? Because we have seen considerable price appreciation in gold in recent times.
Gold over a 25-30 year history; we had released this study a few months back, that in 24 out of 25 emerging markets, the returns of gold were higher than the returns that their stock market gave in their local currency.
Now Indian investors inherently own a lot of gold because of our cultural background of saving through gold. If you have enough gold, then don't go overboard. Then from a portfolio approach, gold has a meaningful role in complementing equity returns. So the returns of gold over a 30-year period have been maybe 1 per cent lower than equity.
But its path of returns is opposite to the path of returns of stocks. So in years when stocks have not done well or corrected, gold has actually gone up. So, gold cushions the volatility of your journey if you have it as a part of your portfolio.
Having said that, if because last one year, returns are 40 per cent and hence you are investing, it is a wrong reason to invest. If you look at the history of gold prices in India in the last 30 years, there are long stretches of 4-5 years where gold returns have been 0.
There are stretches where gold has fallen by 25-30 per cent also, just like stocks. So the price fluctuation of gold is as much or slightly more than equity. So, gold will have its periods of volatility. A better way is to blend it through multi-asset allocation funds where the fund itself will have between 10-20 per cent depending on where we are in the cycle. I personally use that route to have some indirect exposure.
