By Nikunj DalmiaI always maintained that India is the most attractive market for alpha generation, for the potential for outperformance and not necessarily for the market return itself, says White Oak Capital Management founder. Given that we have had a relentless rally, a trailblazing comeback in equities at a time when the concerns are well known, the best of the bulls are saying that this is too good to be true and markets are going higher only because of liquidity and central bank policy action. Do you think the market right now is running ahead of itself?It has been a similar version of the story for the last 11 years now, since the Lehman crisis when the markets bottomed out in early 2009. Globally, particularly in the US, people have been talking about markets being ahead of themselves, it being all liquidity driven. There were so many acronyms or new phrases that have been coined — QE or quantitative easing or taper tantrum for some cliff or the other, Brexit. All these fears have come along the way where people have been looking for the next Lehman around the corner or behind the pillar, all along blaming liquidity or quantitative easing for driving up the valuations. These are all related to market timing or market-wide views which have very little predictive powers. If you were to look at the timeframe of 11 years, in 2009 most macro gurus would have been unanimous in calling the US the next Japan, Japan being an acronym for going to hell. Since then, it has been the best economy, best equity market and best currency. So, everyone has been proven wrong by the market. I do not have any strong view on where the market is headed and I think nobody has a clue but one way to think about multiples is that all valuations are relative and the ultimate benchmark is the US long bond yields. When I went to study in the US in the mid 90s, the bond yields were 6-7% depending on maturity. If you invert that, the bond multiple was 15 to 17 times. At that time, the market S&P 500 multiple was also around 15-16. Today the bond yields have gone as low as 0.5% to 1%. The multiples have gone 50 to 100 times the bond multiples. Market multiples increase but to 20 times equity market. I am not suggesting they ought to go 50 to 100 times. For someone, who is looking at investing in India, what should be the return expectations? Do you think the years of underperformance are behind us and in the next couple of years India could outperform not only the developed but the peer emerging markets also?We are always in dialogue with clients worldwide, not just now but even 10-20 years ago and I always maintained that India is the most attractive market for alpha generation, for the potential for outperformance and not necessarily for the market return itself. At any point in time, it is reasonable to assume the Indian market would deliver the same return in dollar terms as the US market or any emerging market. Over prolonged periods of time, that tends towards the nominal GDP growth rate of the country. It has done so in the US, it has done so in most of the developed world, it has done so in India as well. When you think of 20, 30, 40 year time periods, going forward I do not see why it would be any different. Now, what is different is the inefficiencies of the various markets. India is a far more inefficient market than developed markets like the US. There have been many studies comparing Indian market not only to the developed world but also to many emerging countries. Not too long ago, Wall Street had published one of these studies. Study after study shows that Indian markets provide the opportunity for generating higher alpha or outperformance compared to other markets. Since the total return is composed of market return plus the outperformance, if the market return is the same for all, if you buy into that argument that ex-ante, it is reasonable to assume all markets will generate similar returns and the difference in total returns between various countries would come from the alpha generation and if it is higher in India, then a manager can generate higher total return in India than in the US and hence you have many well performing managers in India who have over the last decade or two generated higher returns in dollar terms compared to the comparably ranked US managers, even though the Indian market might have trailed the US markets by a few percentage points. That is one reason why I invested money for Reliance in the US market while I lived there for 11 years from 1995 to 2006. Personally, all throughout, I have been invested in the Indian market because the alpha potential has always existed and continues to be so even today.
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