bl.portfolio caught up with Parameswara Iyer Krishnan, Managing Director and CIO, Spark Asia Impact Managers, recently, in Chennai.
Krishnan manages assets of about ₹1,200 crore predominantly under two PMS strategies – Core & Satellite and Flexicap, which were started in 2019. While his funds may be young, Krishnan is a veteran with over 34 years of experience in markets and fund management.
Edited excerpts from the conversation:
In the latest communication with your investors, you say that things such as TINA factor and availability of liquidity are not sufficient conditions for the equity rally to continue and that there is a sense of complacency and entitlement among equity investors today. What are the factors in today’s markets that are worrying you?
The worry is on two counts. One is that many companies in the mid- and small-cap spaces, especially the ones that have had IPOs in recent years, and those tapping the markets now, are trading at valuation or market-cap levels based on hardly any logic in relation to earnings. The price discovery is not happening on the basis of any fundamental factor but based on demand and supply.
I am not saying all large-caps are properly priced or attractive. There is capital with these companies and ongoing growth in many cases. If the valuation spikes, you can say that temporarily it is overvalued and if you have a flattish performance for a certain period of time, it will even out. But in the smaller companies, some of the newly listed ones are not profitable yet.
And in many cases, the nature of these businesses is also that they are more ‘mono line’ where the vulnerability can be much higher. These are not factored in the market and therefore if things start to go wrong, they can go wrong with a multiplier effect on the way down. So, one has to be cautious when making money on momentum.
The second concern is that people are claiming that Nifty valuations on the aggregate are below 2021 levels and hence the market is not expensive. However, the number of stocks trading below the mean is fewer. The asymmetry between why you do things and how things pan out eventually can set us up for trouble in future.
Of course, fundamentals continue to be strong and post-Covid, the earnings growth has been robust. But what is a bubble is hard to define and mostly, people know about a bubble after it goes past. I am not saying we are at a peak but what we are trying to say is that you have to moderate your return expectations from here.
Going back to the liquidity issue, we have seen that whenever there is a crisis, liquidity is injected into the system which finds its way to the equity markets, propping it up. Do you think the party will go on as long as liquidity is available?
if liquidity alone is expected to keep supporting markets, we must keep in mind what happened in Japan in the 1990s and how long the markets took to bottom out. So far, the liquidity unleashed following the global financial crisis or more recently, Covid, has helped. But it is not liquidity alone that has created and sustained all (bull) markets. In today’s context, there is large SIP money coming in from the middle and upper middle-class who have to keep investing to meet their goals, but we still do not know how people will react to an adverse event which many new investors post-Covid have not yet witnessed. The Covid fall too was very short-lived to test any one’s mettle.
Secondly, foreign investors always have alternatives. People argue that FPI dependency has gone down, which may be true in part; but if there is concrete selling, FPIs still own about one-fifth of the market. India’s weight in the MSCI EM Index has gone to 20-21 per cent now while China is at around 25 per cent.
When I used to work for a foreign fund about two decades ago, India was about 4 per cent weight and China, double that. At that point, we said that there is promise in investing in India as we had better fundamentals than other markets which, at that time, had higher weight — such as Taiwan, South Korea, Brazil, Russia, etc., and that our weight was only going to go up. At this level now, margin with China has narrowed. We should remember that the Chinese economy is still about five to six times the size our economy and we cannot completely dismiss it off.
What are the pockets in the market that look interesting to you now?
Insurance stocks are not in a bad place today. These are high-quality companies with good balance sheets. They are not small-caps and liquidity is also good. But these are the kind of companies that will help you get reasonable returns and not extremely high returns. I agree now the banks are attractive but only thing we have to remember is that it is a cyclical sector, we have to determine where we are in the cycle.
I would say we are in the middle of it now and while you can’t see further dramatic improvements (in various metrics), you are also not likely to see deterioration. Therefore, I see there is more in the cycle and that will help re-rate these banks, but in a reasonable manner.
If you plug in the mean valuation, there is some scope for upside over the next two years. But it may not be with zero volatility because there are pockets in the asset mix that are seeing some stress and nowadays, the moment some news comes, market is very punishing and so you have to be careful. We are in a market where timing and the price you pay matter.
So, are saying a ‘buy and hold’ strategy will no longer work ?
Whether one can really buy and sell at the right time is a question but buy and hold is going to have limitations as more businesses are becoming cyclical and cycles themselves are getting shorter. This factor doesn’t lend itself to taking very long-term views.
Secondly, liquidity can be a double-edged sword and when it hits you on the wrong side, your investments go down, making a buy and hold strategy less rewarding.
The third factor is that you are at high starting valuations today unlike multibaggers of the past, which started lower. However, I’m not saying we should all take short-term views and trade, which is also risky. In general, we take a 1–3-year view.
Is a US recession a possibility or not, in your view ?
We need to closely study what’s happening there and I am no expert. But it seems like if at all you get a recession, it will be a very shallow one because the economy seems to be self-correcting in the US along the way. It may be a reasonably quick one like the 2001 recession and more likely be defined by lower growth. Lower growth in the US is not bad for India as, one, commodity prices will be lower and two, the tendency of global (foreign) capital to retreat will be lower, especially given the bright spots in our economy.