We had published an article some time ago on low interest rates and their impact on equities Click here.
And then we spoke to Chintan Haria from ICICI Prudential, probably the foremost expert in the industry to help us figure out the impact of interest rates.
Mimi Partha Sarathy: Chintan Haria, you are a person who completely focuses on macro factors. Can you just give a quick summary of the current market situation and is this entire euphoria a liquidity driven euphoria thanks to low interest rates? And the high valuations, we are seeing today, are they sustainable?
Chintan Haria: This is an interesting topic and honestly, we have never seen 0% interest or interest rates as low as they are right now. What will happen in 3-4 years is something for all of us to see, learn and live with. What we all know is this, the last 10 years a large debt burden of almost $110 billion has been built which has now gone upto $240 Trillion. The lower interest rates have fueled the US equity market from $50 trillion of equity market valuation 10 years back to $110 trillion of equity market valuations.
Equity markets its long-term market cap to GDP used to be 110-120 today it is trading between 220 -250 market cap to GDP.
A large part of this is because the US led Tech companies are having market cap which is equal to the size of Indian GDP. Clear overvaluation or a market capitalization boom which has happened because of low interest rates.
Mimi Partha Sarathy: Are we to believe that interest rates will remain low forever?
Chintan Haria: The answer is no. And that brings us to the next point, if interest rates are to rise in the next one or two years, we are seeing the lowest equity levels in the last three to four years. Clearly valuations in India or globally are not cheap. But amongst the rest of the world, India is the growth engine. Everything that can go right with India is going right with India.
Macro points like India’s software exports becoming higher than our import bill of oil, our currency reserves of more than 600 billion dollars. Across the board many industries are doing well, focussing back on manufacturing and infrastructure, means that there is money to be made in India. So while you can’t go out of equity markets in India, if the Global markets become volatile you have to manage your portfolio well.
Clearly it is a time to look at your asset allocation now. The last 15 months had seen 100/100 stocks going up. The next 15 months may not be so easy. Bottom-up stock picking has to be done, Best done by a fund manager to get a good portfolio for the future.
If interest rates go up, the first calamity will be the bonds. While we don't see the equity markets collapsing, there will be first be a normalization of interest rates before that. Interest rates have gone down much below their normal.
A normalization of interest rates, not INCREASE OF INTEREST RATES WHICH WILL STIFLE THE ECONOMIC GROWTH. Once interest rates go up money may flow from the $240 trillion bond market into either equities or gold. From an investor standpoint we are positive on gold, oil and equities. As long as you are in the right space there will be money to be made.
There are so many macro factors that affect the markets, which is why it is important for you to have a financial advisor who knows how to maximize your returns in the face of uncertainty and euphoria. Important trigger points which will surely cause pain to our portfolios and investments must be carefully studied to understand their implications on our portfolio. Our planners work with the best macro-economic advisors in the country to foresee, plan and allocate with contingency plans in place for all eventualities
We urge you to have conversations with financial advisors who have seen and navigated these cyclical rises and falls. They are in the best objective position to help you understand and mitigate the risks of letting emotion get the better of you.
We urge you to have conversations with financial advisors who have seen and navigated these cyclical rises and falls. They are in the best objective position to help you understand and mitigate the risks of letting emotion get the better of you.
We can help you understand how to maximise your investment goals or leave a comment below on your thoughts.
