Investor greed is the biggest problem: S Naren | Economic Times

For every valuation cycle to break, there is a requirement of a trigger and that trigger this time cannot come locally. It has to come globally and it will come globally. We are not seeing a problem in the macro or business cycle, says S Naren, CIO, ICICI Prudential AMC. We are staring at a bull market like never before. A bull market which has been uninterrupted, a bull market where correction has not been there and a bull market where everybody is convinced that the earnings upgrade cycle is here to stay. How would you characterise the current market environment? Is it FOMO, is it euphoria or is it a bubble?I have the advantage of seeing the 1994 market when everybody got dragged into the markets. Also, people forgot the word risk in the 1993-94 cycle and used to think the word equity meant only profits and nothing else. This cycle resembles that. At ICICI Prudential Mutual Fund, we manage other people’s money and that becomes a source of stress for all of us. We have to be always conscious that the word risk cannot be forgotten and that is the challenge because if you look at the local macro or the local business cycle, I do not think there is anything much to worry at this point of time because there is no negative event other than oil prices increase which has been handled very, very well so far by the government. We are not seeing a problem in the macro or business cycle. But investor greed is a bigger problem. They think that there is only one asset class called equity and there is nothing called risk and that is the bigger problem rather than anything else in the macro or business cycle from an India point of view. In the world, all the way from 2012, people have not seen market corrections in the US. There people are used to investing in stocks and not worrying at all about market corrections except in 2018 December and 2020 March. So the biggest risk at this point of time is investor greed and that is something which we will have to be worried about. Why is it that 10 out of 10 brokerage houses are insisting that market valuations are out of sync. We are trading way above historical averages and every time when such valuations have happened in the past, markets have come tumbling down. Do you think we should take all those extra magnified analyses on valuations with a pinch of salt?At ICICI Prudential, we have been using a model which is valuation, cycle, sentiment, trigger. If you recall the NBFC boom, it kept on going till a trigger happened called IL&FS and DHFL. For every valuation cycle to break, there is a requirement of a trigger and that trigger this time cannot come locally. It has to come globally and it will come globally. But if you recall the bull market in 2017, people used to think that small and midcaps will always outperform largecaps and suddenly a trigger happened and it disappeared like that. There will be a trigger. The problem is that this is a global central bank bull market and the global central bank bull market will be broken by global central banks one day because we are seeing the side effects. Zinc has gone up 20%, 30%. Gas has gone up suddenly. Oil is going up. All kinds of commodity prices are going up and there will be a side effect of the $25,000 billion which have been printed by the global central banks. One day, the global central banks will be forced to act in a way they have not prepared the markets for. When that happens, we are going to have that trigger but the fact is it is the global central banks which are going to provide the trigger, not a mutual fund like ICICI Prudential. We are all going to be innocent victims and people are going to ask us why did the market fall and we will say “global central banks”. So that is the situation. Yes, valuations are extended but valuation mean revert. In the US market, there are so many people who said valuations are high, it will mean revert and for the last three years or four years whenever anyone has said in US markets mean revert, they have not mean reverted because the global central bank has decided that they have to push up the market to stratospheric level. So markets have not mean reverted. For the markets to mean revert there has to be someone who has to say that I do not want interest rates at zero forever. I have to create a cost of capital because there is a side effect of inflation and the inflation is not transient. Now for everything they say everything is transient. These are the things which are going to be decided by global central banks. We are going to be the victims and that is something I am reasonably clear about. We cannot determine the timing because everything depends on global central banks. How should one understand the energy issue? It is not just crude, it is about shortage in coal, shortage of power, uptick in raw material cost and a complete breakdown in supply chain. Should we look through it or is this something that will haunt us?It is a very complicated issue because we are looking at net zero. There is a green movement which is required for the world’s existence. So the green movement has to happen at the same time we have not got rid of our dependence on fossil fuel. So on one hand all the fossil fuel development has stopped in the last 5 to 10 years. The green movement has happened but neither solar nor wind energy production has scaled up in a big way. So it is a very complex thing and no one knows how much wind energy production happens in a particular day. So this is a problem emanating out of net zero and COP26 and various other things which are going to happen over a period of time. It is such a complex issue and the whole world is going to handle it. Look at the kind of gas price increase that Europe and particularly the UK have seen. They have closed all their coal based power plants. The kind of issue that they have at this point of time is very significant because they are moving towards net zero in a very disciplined way. If we see some good breakthrough technologies in the way of batteries and we are able to store the power in a very significant way, the problem will get resolved much faster. Otherwise how to get out of our fossil fuel fixation without a solution it is going to be one of the most complex issues for the world to handle over the course of the next decade and I do not think people like us have all the solutions and all the answers. We only have the questions.