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30 years of wealth management, 30 years of superlative CAGR returns. They say good news and good prices rarely come together. Right now, the news is great. But when the news is great, prices are bad. What is the way forward? What should be the message from Birla AMC? And what should be the takeaway for them?
Mahesh Patil: Yes, good morning and welcome to this voyage event. I think we have been through this occasion and we have been trying to put forward our views. Okay, every time we come, okay, and talk over here, we are always worried. The market has reached a peak now. That is a common question which is there. But you are right, Last one year has been unprecedented. The kind of returns that we have seen and the market has been climbing the wall of worry. We had all the concerns, last year, we had the Russia-Ukraine crisis which had started earlier, high interest rate, high inflation. And despite that, we have seen fantastic returns. Obviously, markets have gone slightly ahead of fundamentals is what we can guess from that. But yes, sentiments are at its peak. But the same lot of scepticism is also there.
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A lot of foreign investors were selling last year. It has been the domestic investors who have seen strong inflows over there. But, when you look at the market or even the stocks, the way we look at it, a stock becomes expensive because of price appreciation. But it is more forward looking which is the story likely to unfold going forward and that is where the India story is.
The theme of our event is Dominant Bharat. If you really believe that Bharat is going to be the third largest economy in the next seven years, and the GDP is going to grow at 7% plus, then you will see a lot of opportunities emerging. Corporate India growth has been very strong in the last two years and will continue to grow at a double digit rate. If that is the case, then while markets might consolidate a bit in the near term because of the huge outperformance, you will still make the long-term returns the markets have given.
In the last thirty or twenty years, markets have been around 13% compounded, which is a great return that one can expect and there will be some challenges. We are entering into a period where the US economy and globally, we could see some slowdown. There could be some hiccups, but clearly for investors or who are taking the longer term view, this is an exciting time to be here.
For the first time, a lot of fundamentals are falling in place. GDP, investments, which have not really fired in the last ten years, are now starting to do well. That will continue to sustain our growth. Most importantly, India’s macroeconomic stability has really been a significant improvement over there. For a developing country, that is most important, whether you look at our currency. The volatile currency in the last, two, three years has been the lowest or the top lowest decile compared to either a developed market or the world, the emerging market currencies.
Interest rates have been fairly stable. So macroeconomic stability would ensure that India’s risk premium needs to come down. That will mean that India will continue to remain expensive. We are not going to get cheap, and people always complain that India is expensive compared to other emerging markets. That premium will continue to be there. If the GDP grows from here, corporate earnings grow, we will see reasonable returns from here.
If the last two-three years have been great, if one looks at the next five years, next ten years, do you think equity returns will be in line with the historical averages, which is anywhere between 13% and 15%, if the starting point is today? Will future returns be in line with long-term averages for the next five to ten years? You may get one good year, two bad years, three good years, four bad years, but in general, five to ten years, will the averages of long-term be maintained?
Mahesh Patil: Yes, while the last two-three years have been fantastic, we went through a painful period in terms of economy from 2013 to 2018-19, where the earnings growth trajectory was much lower than the long-term trend. I mean, our long-term trend of earnings growth has been slightly higher than the nominal GDP growth which is, as you know, and we were growing at around say 5% or so. I think in the post-COVID period, where we have seen that acceleration and where a big transformation has happened. We have seen the overall productivity, the ROEs of the companies have gone up. India has really handled the whole digital transformation very well. That also places us in a better position in terms of globally the changes that we are seeing and the way the world is reimagining.
India has now arrived at the centrestage. India is likely to be a supplier to the world in a larger sense, and that is the opportunity which was not there earlier. That puts you in a different growth trajectory going forward. I would say that if you look at the broader market right, there are pockets of over-exuberance in the market which are there, but if you look at Nifty for that matter. So while Nifty has done well in the last two years, its earnings growth has also been in line with the returns that Nifty has given.
So the market is fairly valued and slightly above the long-term average. In that context, returns should track earnings growth is what one would expect and earnings growth will broadly track nominal GDP growth. So one can expect the long-term trajectory of earnings returns and market returns is what investors can expect over the next five years.
There will be ups and downs. After such a large outperformance, there will be a period. In the last eight years, the market has not given negative returns. This has been the longest streak that we have seen. It can still continue, but we should look beyond that and undertake a view for the next five years. That looks good even from here.
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