‘Even the Chinese government doesn’t want a Lehman-like situation to happen’

Both the US Federal Reserve and the Reserve Bank of India are on the path of increasing rates. How will this affect the equity market?

You have to look at how rates have risen – whether they have risen very sharply, or in a measured way, as has already been expressed by the Fed or RBI in the market. Therefore, it is very difficult to predict how fast or how slow the rate hike will be. But of course, given the level of inflation, given the GDP growth, the rate hikes are coming. So, there will be market volatility at the time of the event, which you saw during the Fed meeting 15 days ago, and there was a lot of discussion about how the tapering would happen, and how inflation would go up. So, I think we will have to wait till December-January to see whether this inflation is picking up, or whether this inflation is a permanent aspect, and these rate hikes are needed to pull back the demand. I think, as of now, it looks like a supply side issue, not inflation related to the major demand side. So, I don’t think people will sacrifice growth on interest rates.

To what extent is the real estate crisis in China going to affect us?

Other than the noise around what’s happening in China, and if it could lead to a massive emerging market decline, I don’t think we’re directly connected to it. So, it will have more impact from the point of view of flows and not from the point of view of economy. And what we understand is that we don’t want another kind of Lehmann type event, and even then the Chinese government will be aware of it, and don’t want to get into that kind of domino effect.

What one or two themes will be driving the market in the next few years? For example, private banks taking market share from public sector banks. So, are there similar things that can come into play?

Some Companies in the new platform can grab market share from the organized or unorganized segment. It could be one of those things that matter purely in terms of earnings growth and sales growth. As you mentioned, private banks are taking market share of PSU banks, and possibly fintech firms grabbing market share from private sector banks. Also, in the real estate sector, a strong brand player can grab market share from Tier-2, Tier-3 city real estate companies in a particular area or a particular segment.

Profits are being concentrated in a few companies that are able to manage their balance sheets well, that are able to navigate their business cycles, and are able to raise capital on their well. Therefore, wherever companies are meeting these characteristics, they will gain market share. And the biggest thing we have seen playing out with covid is gaining significant market share from the unorganized sector to the organized sector.

Are there any areas where evaluation is of concern to you?

There is concern about valuations across the market. 15-20 years ago, when I came into the market, 23-33 PE also looked expensive, but the dynamics were different. The interest cost was very high. Cash flow was weak, return on equity (ROE) was weak. If we go fast so far, the improvement in ROE has been strong, cost of capital has come down, market share has been strong. So, you are commanding the valuation that you are commanding. It is clear that there are some upcoming IPOs and what kind of valuation they are getting and we are thinking that the listed companies are better. But obviously, the ROE is high, the flows are very strong — both globally and in the domestic market, and the cost of capital is low, which is why there is a high valuation. If things have to turn around, if there is a sudden cost increase, there will be concerns about valuations.