Investing in stocks: ETMarkets Smart Talk: FDs may be appealing to the common man, but stocks yield 12-14% over a 10-year period: Dr Joseph Thomas

“FDs will suddenly become more attractive to mainstream investors as interest rates continue to rise, especially socially for those who dislike taking market risk,” says Doctor Joseph ThomasHead of Research, Emkay Wealth Management.

In an interview with ETMarkets, Thomas said, “But the opportunity cost is a 12% to 14% return that stocks can give over a ten-year period, and that too in a fairly diversified portfolio.” Edited excerpts:

As central banks consider tightening the money supply, what is your view of the markets in the medium to long term?
As central banks tighten monetary policy and normalize liquidity, markets will trade lower as the glut of liquidity has played some role in high valuations.

As US inflation remains well above 8%, the US Fed should tighten more aggressively. In addition to this, the Fed has a plan to reduce the size of the balance sheet which will lead to a flow of liquidity from the markets to the coffers of the central bank.

This will support tightening efforts to achieve price stability. The ECB could also start to tighten before long, while the Bank of England, like a few other central banks, is already halfway through its inflation-fighting measures.

High inflation, higher interest rates and lower liquidity are the main enemies of stock markets. What you have to see is how much of that will dampen growth.

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Despite negative developments, a strong growing economy could offset the impact of many shock absorbers and contribute to a rapid market recovery.

Markets have already traded lower and the downside margin could be quite limited from now on compared to the moves seen so far.

Inflation may only peak in the next two quarters and as such the central bank’s policy stance may also shift accordingly.

A slew of stocks saw a 30% or 40% drop from their 52-week highs. It may be time to start investing incrementally to take advantage of relatively fair valuations, otherwise the levels could simply disappear.

Encouraging data from MF in May and SIP flows are increasing slightly, which is a positive sign, but at the same time redemptions are also happening. But do you foresee more funds being allocated to fixed income versus equities?
Historical trends indicate that a prolonged decline in markets could deter people from pursuing SIPs. This may happen as we have seen quite a few fixes, now spread over several months.

But there is no way that the average SIP figure of Rs.10,000 cr. completely disappear. At worst, it can be halved.

But, the fact is that for retail investors, SIP is seen as a safe way to invest in stocks. This fundamental thesis still holds. The fact that equities correct does not in itself lead investors to fixed income securities.

Fixed income securities also don’t offer much immediate opportunity due to expectations of higher rates, particularly on the long end of the curve.

Lower interbank liquidity, heavy government borrowing program, high oil prices and weak rupiah are all factors influencing the trajectory of market returns.

The next target for the GOI’s 10-year benchmark is around 7.90%. Therefore, in fixed income securities, if one is to stay away from the risk of depreciation, it is to stay at the very short end of the curve like overnight funds or liquid funds and short-term bonds.

Demand for long bonds will only increase after market yields have saturated and there is a general feeling that rates may be relatively cheaper and may stabilize or saturate.

If anyone is planning to put Rs 10 lakh now – that is the perfect way. What is the ideal asset allocation strategy?
The asset allocation strategy should be linked to the individual’s risk profile. However, for a risk profile or moderately aggressive investor, at current market levels equities can be around 60% and the rest in very short-term debt with an option to redeploy another 20% short-term debt into equity over the next two to three months.

Do you think FDs will now become more popular, at least for the risk averse investor, in light of the rising interest rate scenario?
FDs will suddenly become more attractive to mainstream investors as interest rates continue to rise, especially socially for those who dislike taking market risk.

But the opportunity layer is a 12% to 14% return that stocks can give over a ten-year period, and that too in a fairly diversified portfolio.

The FD, if they give 5% or 7%, it’s barely enough to hedge against high inflation.

We saw the rupiah hit a record high in June – which stocks or sectors are likely to benefit the most from the rise?
The depreciation of the Indian rupee benefits export-oriented companies, but the profit would also depend on the amount of uncovered receivables and payables positions. One of the main sectoral beneficiaries is IT technology and services.

Indeed, these companies carry out the majority of their activities in foreign countries, in particular the United States and Europe, and are invoiced in American dollars. Even Nifty50 companies have significant business revenue from overseas.

Crude oil is also hovering around $120/barrel – which might not put India in a comfortable scenario if it holds around that level. What will be its impact on the economy, as well as on valuations?
India spends nearly US$120-130 billion to import oil every year. It’s a pretty big bill. A rise in oil prices upsets this calculation. We end up spending more to buy oil.

This is made more painful for the economy with a weaker rupee, again resulting in higher import costs. These import costs translate into higher price levels for the economy as a whole.

Higher prices negatively affect aggregate demand and also reduce business profit margins, except where they are able to pass on some of these costs to the consumer.

Labor costs also rise in a high-cost, inflationary economy. Due to these factors, valuations are also affected.

With rising interest rates, do you think that would lower valuations?
Cheap liquidity and lower interest rates contribute to the expansion of the P/E, and if liquidity decreases and rates rise, the opposite will happen.

The only preventive factors are a very high GDP growth rate and robust aggregate demand. Therefore, almost always, rising interest rates will lower the valuation.

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts belong to them. These do not represent the views of Economic Times)

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