Markets are cyclical; it's a good time to invest: Deepak Shenoy

After two years of muted equity returns, investors may be closer to the next leg of the market cycle, with earnings growth showing signs of a meaningful recovery and the capex cycle picking up. Deepak Shenoy, founder & CEO of Capitalmind Mutual Fund, believes the market is approaching a more favourable phase, which could translate into a broad-based rally. In an interview with Saloni Goel, Shenoy said market returns tend to be concentrated in a few years and that investors need to stay invested through both bull and bear phases. Edited excerpts:  

 

The earnings momentum in Q2 is expected to be robust. Do you expect it to pull Nifty out of slumber? 

 

 

Overall in the Nifty 500, the median earnings growth has risen to 18 per cent. The last time we saw some number like this was in 2021 because of the COVID base effect. Take that and marry it to credit growth of 19-plus per cent. What we are seeing is a return of capex, and it has started to reflect in profits. 

 

Earlier, in the last few quarters, earnings growth had slowed, and profit growth had increased. Companies were able to get more margins from their current capacity. As a result, topline was not growing much, but the bottom line was expanding, which means companies were getting more efficient. But that only lasts so long because you can't push efficiency beyond a certain metric. 

 

Now, the capex is coming on the back of increased demand from industry. And once it is done, you'll see that both the revenues and the profits move correspondingly higher. The market has not yet recognised this phase, but will do so eventually.

 

And going forward, if earnings continue to grow like this, we're going to have a very responsive market. The way earnings are structured, this is not a one-time phenomenon. 

 

IPO market helps investors get to invest in new companies. Do you see that as a positive development because the other side of the argument is it draws liquidity away from the secondary market?

 

A lot of the great companies were unlisted in India. Even today, the biggest exchange in India is unlisted. Some of the biggest retail giants are unlisted. But this is beginning to change. When new players come into the market, you get to participate in their growth. No business model survives forever, and established companies are constantly being challenged by new entrants. We want these new businesses to come to the public markets so that investors can participate in their growth. 

 

For that, we'll have to give up a little bit of today's gains, which are anyway on the back of extremely high valuations for what I call liquidity premiums. 

 

Inflation has been higher, and equity returns have lagged. What does this environment mean and how should investors allocate their portfolios? 

Markets are cyclical and therefore will give you outsized returns in one year and undersized returns in another year. It’s never always the same. Market returns are always concentrated and bunched in a few years. 

 

If you look at the past, roughly once in three to four years, you get a big raging bull market. And then you get a bear market or sideways market of 2-3 years. Maybe we are passing through the two years of bad before we get the year of good. 

 

So as an investor who's been in multiple cycles, I am confident that, for the averaging out of returns over a period of bull and bear markets, you have to live through a bull phase. That bull phase will come to us and make up for the lack of returns in the last two years.

 

This gives me the confidence to say it's actually a good time to invest.

 

What's your assessment of the Closing Auction System introduced by Sebi amid sharp swings and allegations of manipulation?  

 

This first month has been very boring in the cash session. Though futures and options traders are complaining. It's the early learning pangs and would take some time before everybody gets involved, and the price discovery becomes better, as currently the volumes are extremely low. We need more participants. Until that happens, there will be some fluctuations which we won't like. 

 

You recently mentioned on X that debt in the West is becoming an issue. Long-term borrowing costs across major economies are at multi-year highs. What are the implications for the equity market from this, especially for EMs like India?

 

India is actually in better shape because our debt levels are not very high and our yields are very decent. America, Japan, and Europe are where the problem is.

 

There are consequences of the debt being high because when you refinance that debt, you have to pay much higher interest rates. This will introduce inflation by increasing deficits. To counter that inflation, the interest rates will have to be raised, and as a consequence, emerging markets get impacted because less money flows from developed countries to EMs in a rising interest rate scenario in the West.

 

While there will be some impact on India, I expect it to be lesser because structurally we are a lot more stable and our markets are determined by our own SIP inflows rather than foreign investors. 

 

We have seen a decline in small-ticket SIPs, which basically witnessed a boom post the pandemic. What do you think could be behind this? 

 

The absolute number of SIPs is not falling. Only the smaller SIPs are facing a decline. You can attribute two things to it: First, some of the smaller players have upgraded to larger-ticket SIPs. Say, you started with a ₹500 SIP and then eventually scaled up.

 

Second, to some extent, maybe some of them have moved away from the market. It’s normal, as some investors do get frustrated with the market, while some others come in.

 

A year into Capitalmind Mutual Fund, what has surprised you the most about moving from PMS to serving a much broader retail investor base?

 

So, a PMS is a very relationship-based product. You know your customer, you've talked to them, understood them, and then given them what they need to do. That PMS continues, because the richer investors do need that hand-holding. 

 

At the AMC, we've realised the bigger thing is broader communication because customers will come on their own accord and get out of their own accord. To that extent, we don't hand-hold or know every customer. We have more than 13,000 customers in the mutual fund space and have reached pin codes which we didn't know existed in the first place. So in that sense, there is a very big difference in how you reach your customers. 

 

If we speak again at Capitalmind Mutual Fund’s fifth anniversary, what would you want the AMC to have achieved? Not just in terms of AUM but also investor behaviour, product offerings, etc. 

I would be very happy if people come to us, say they've invested with us, built their wealth, taken it out, spent it and improved their lives. I want people to come in and make their lives better. That is what achievement really looks like. 

 

We as an AMC industry tell people to keep investing. I want to add to that and say keep investing for a purpose and fulfil that purpose. In the next five years, I hope I'm able to see a lot of our customers achieve that, as it would give me happiness. 

 

Our AUM will come. It's not my driving force for everything. It helps us because it makes us profitable. We are not yet profitable, but will be at some point.

 

We will also grow to more cities, more products. But would want to be remembered by making people's lives better and not by saying I did a 15 per cent return or 18 per cent return. It's meaningless at some point.

 

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