Rate Cuts Signal Weakening US Economy: Caution Advised Despite Risk-On Sentiment

ETMarkets Smart Talk | Rate cuts signal weakening US economy, caution advised despite 'risk-on' sentiment: Aashish P Somaiyaa

"Rate cuts typically occur with weak economic data. So, yes, on first thought, people might believe it's "risk-on," but it's usually accompanied by poor economic data, which one should expect from the US, and this could jumble up sentiment for a while," says Aashish P Somaiyaa, ED & CEO, WhiteOak Capital AMC. In an interview with ETMarkets, Somaiyaa said: "FII outflows might occur due to the negative outlook on US equities, and some market downside is expected. But with a lag, as currency dynamics shift, we should see significant FII inflows" Edited excerpts: It looks like the stars are aligned for a possible rate cut by the US Fed in the next policy meeting. Does this indicate a sort of "risk-on" sentiment for equity markets? Everybody views interest rate cuts very positively. However, I believe one needs to think a bit counterintuitively or with second-order thinking. The reason being that rate cuts and the magnitude of change in expectations can only occur with weakening economic data. Generally, rate hikes come with strong economic performance and the need to curtail price growth and inflation. Conversely, rate cuts typically occur with weak economic data. So, yes, on first thought, people might believe it's "risk-on," but it's usually accompanied by poor economic data, which one should expect from the US, and this could jumble up sentiment for a while. Absolutely. For India, FIIs have been net sellers, at least in the cash segment of the Indian equity market, so far in August. Will a rate cut have any impact on the flows for the rest of FY25? There's no fixed or predictable playbook here, but I'll tell you what I think, based on past observations. As I mentioned earlier, rate cuts generally come with poor economic data. Take March 2023, for instance. When Silicon Valley Bank, Signature Bank, and a few other institutions collapsed, many expected a scenario similar to the Lehman Brothers crisis, believing the US financial system would experience a domino effect. Back then, the expectation was for three rate cuts in 2023 because people believed the US economy would rapidly weaken. Initially, when this news broke, their markets declined, and our market followed suit. If you recall, we dropped from a high of 19,000 to around 16,700 in March 2023. The first reaction was that their market declined, and globally, all markets tend to correlate during such panics or crises. Then, as the expectation for rate cuts grew, we saw the dollar index fall to 102, with the anticipation of rate cuts building. Typically, when there's a growing expectation for rate cuts, the dollar weakens, which usually helps emerging market currencies stabilize, often followed by FII inflows. So initially, I think FII outflows might occur due to the negative outlook on US equities, and some market downside is expected. But with a lag, as currency dynamics shift, we should see significant FII inflows. Let's talk about the recently launched arbitrage fund, which will open for subscription on August 28th. What is the investment philosophy behind it, and why launch it now? Launching an arbitrage fund isn't so much about timing, but rather about offering a product that meets investor needs. People nowadays prefer to park short-term surpluses, perhaps for six months to a couple of years, and arbitrage funds have become a preferred category. These funds don't take active equity risks; all long positions are matched by countervailing short positions in futures. Essentially, they generate returns from the spread between current prices and futures, making them more of a fixed-income surrogate. From our perspective, it's about rounding out our product range. Investors, advisors, and channel partners who work with us mainly for our equity offerings also expect us to offer products for parking short-term surpluses. Many have expressed a need for an arbitrage fund, so they don't have to go to different AMCs for different products. Those who want to stay invested with WhiteOak would prefer we offer an arbitrage fund so they can park their surpluses with us from time to time. FIIs pulled out around 15,000 crores from financial stocks in the first fortnight of August and chose to raise exposure to defensive sectors like healthcare, FMCG, and consumer services. What is your view on the financial space for the long term? Should investors put fresh money in now? When it comes to financials, a lot of attention is obviously focused on private sector banks, particularly the big ones, because they have been underperforming -- such as HDFC or ICICI. ICICI, of course, has done relatively better, but the general sense is that private sector banks, in general, have been underperforming. There is some pressure with deposit rates and net interest margins, and one has to figure out how much of this is cyclical and how much is structural. The key point is that more and more savings are going into capital markets. This shift impacts the banking system, especially in terms of how much money stays in the form of fixed deposits and what kind of pressure it creates on FD rates from a long-term structural perspective. We still need to see where NIMs settle and how banks compete in this environment. The long-term trajectory is still being worked out. However, if you ask me about financial services overall, we are very bullish. In the last few years, financial services have expanded beyond just banks. For example, we run a BFSI fund, and I can tell you that about 25% to 30% of our portfolio consists of non-lending financials, including asset management, wealth management, broking, exchanges, depositories, fintechs, and insurance companies. So, we are very bullish on financial services as a whole. For private sector banks, we'll have to see how they navigate this turning point in the next couple of quarters. How do you assess the IPO market, where most listings are making handsome gains for investors? Are you seeing any froth or overexuberance at this point in time? If you ask me where we are in the market cycle, IPOs are a necessary "evil." On one hand, we are seeing huge domestic flows, and on the other hand, we are concerned about valuations. One way to manage valuations and spread the flows is to ensure that IPOs and capital-raising efforts get expedited. In fact, I hope more large IPOs come in so that the money supply gets absorbed, and the existing stock of investments doesn't become crazily overpriced. So, big IPOs are absolutely welcome. I understand the concern behind the question, which is related to valuations and exuberance. This is something investors should be cautious about. Whenever there's a small company or a narrow segment of a sector involved, people should exercise caution to avoid overpaying. Sometimes, in moments of exuberance, narratives can overshadow numbers. If you ask me, for institutions like ours, IPOs have been a great opportunity to participate over the last four to five years. The private equity culture in India is now about 15 years old, and many companies that go for IPOs have had private equity investors for 10-15 years. They've been through various audits and governance checks. So, while there will be both good and not-so-good companies, the overall quality of IPOs today is much better than it was a few years ago, largely due to the institutionalization of private equity. Some excellent businesses in sectors like hospitals, defense, financial services, chemicals, electronics manufacturing, and diagnostics have started listing in the last five to six years. From an institutional perspective, IPOs are a welcome move. However, from an individual investor's perspective, there's always the risk of getting carried away by narratives. So, while IPOs are a good opportunity, everyone needs to do their own risk assessment. But the good part is that the quality of IPOs has improved, hasn't it? Absolutely. There's some old-world wisdom that says to stay away from IPOs because promoters are selling, investment bankers are pushing, and it will be fully priced. Now look, there's no point in stating something that's obvious, right? I mean, if you or I want our company to get listed, we'd expect a good price for it. There's nothing secret about that. But it's up to us to do our due diligence and factor in future prospects. That said, the quality of IPOs has dramatically improved. This is not the 1990s. Have you also increased your cash holdings to invest on dips given the geopolitical tensions in the past three or four trading sessions? Other than the perfunctory amounts, we don't really have a strategy to hold a lot of cash in our portfolios. However, if you want to understand how a fund house thinks about valuations and what models they follow, you can look at what balanced advantage funds or multi-asset funds are doing. These are a good indicator. If we're managing a multi-cap fund, flexi-cap fund, or large-cap fund, we aim to beat the benchmark through a factor-balanced portfolio and stock picking, not by taking cash calls. To get a sense of how we view valuations, you can look at how much equity our multi-asset or balanced advantage funds are holding. For instance, in our balanced advantage fund, which can hold between 30% and 80% in equity, we're currently at about 51%, indicating that we're in a fair value range. We don't think the market is particularly cheap. Similarly, our multi-asset fund, which has a range of 15% to 45% equity, is currently at about 25-26%. This suggests the market is in a stock-picking zone. It's reasonably valued, and you need to exercise caution while strictly following your asset allocation. So, which sectors could be a dark horse in FY25? I think we're already seeing sector rotation happening gradually. If you look at the last 30 to 45 days, there's been a noticeable shift. For example, while everyone is focused on manufacturing and defense, I believe... Atmanirbhar theme, the Make in India theme? Absolutely. I've always believed that our product launches should be countercyclical rather than procyclical, purely because investors should have a positive investing experience. Now, here's something surprising: I think in the last three months, our pharma fund must have outperformed the defense and manufacturing funds. This is an example of how rotation is already happening. It's difficult to pinpoint specific dark horses, but what I'm observing is that there are days when IT companies outperform, days when pharmaceutical and chemical sectors outperform, and days when large consumer companies outperform. So, there's clearly an ongoing sector rotation. Investors risk being overweight in small-cap, micro-cap, defense, manufacturing, PSU, etc., while the market action is shifting. On many days, large caps clearly outperform small and midcaps, and defensive or so-called secular sectors have been outperforming cyclicals. Sector rotation is underway, and when there's a belief that US interest rates will go down, discounting factors and growth versus value dynamics will also shift. Now, SIPs touched 23,000 crore last month, and that is a huge number by any means. It is definitely helping our markets remain stable despite FII selling. At the same time, do you think it is pushing stocks into the expensive category? See, the reason I mentioned IPOs is because, ultimately, demand needs to be met by supply, and that is the best way to keep prices and valuations in check. So, that is clearly one factor. Apart from that, if you ask me, for any investor -- whether an advisor or otherwise -- what is considered expensive or not is relative. If you're an investment advisor, determining your clients' asset allocation -- how much equity, how much debt, and which type of fund within equity -- that's the advisor's job. When you come to a fund manager, it's our job to diversify portfolios, identify which sectors are overvalued, which are undervalued, and where to be overweight or underweight. That's part of our day-to-day job. So, like at any other time, even today, on a relative basis, some parts of the market are more attractive, while others are less so. That process continues. What people should keep in mind is that any fund manager or asset allocator, when considering liquidity and the fact that Indians are restricted from investing outside India, must factor that into the equation. If I tell you that the market is going up solely because of liquidity, that would be a lazy explanation. There are many other factors involved. Let's talk about another asset, gold. We've seen quite a bit of action there as well. What are your views on this asset? Should investors raise their allocation toward this precious metal? I feel that gold should either be a serious part of your investment portfolio, or, as in many cases, it should just be ornamental. Half measures don't work. Let me give you an example: in our industry, there's a category called multi-asset funds. Now, most of these multi-asset funds hold around 10% in gold. But if you have a fund with 50%, 60%, or 70% equity, then 10% gold is ornamental -- it's not going to play any significant role. If you take a multi-asset fund as a proxy and look at customer asset allocation, my view is that you should either have 20% gold in your portfolio or none at all. I'll tell you why. We all have gold at home, but that's ornamental. I'm talking about deliberately buying gold, whether it's physical gold, certified gold, or gold ETFs -- that's your choice. From an asset allocation perspective, many calculations suggest that you should have gold in your portfolio because it has a low or negative correlation with equity. But here's the interesting part: those correlation equations are only relevant when you have equal amounts of gold and equity. When you have one rupee of gold for every one rupee of equity, those past correlations work. I can show you plenty of correlation data to prove that, from an asset allocation perspective, you should have gold in your portfolio. However, if you buy my logic but then invest seven rupees in equity and only one rupee in gold, will that one rupee of gold play any role in curbing the volatility of seven rupees of equity? The answer is no. So, if you're genuinely a conservative investor who wants to reduce volatility, you must have 20-25% of gold in your portfolio or something else that can counterbalance the volatility of equity. What I find is that many people don't have gold in their portfolios at all, and that's perfectly fine. I assume they are aggressive investors. But what I find funny is that some people do have gold in their portfolios, but it's only 2%, 5%, 3%, or 4%, much less than 10%. In that case, it's just for emotional peace of mind -- it's not going to play any meaningful role in the portfolio. Let me also talk a little bit about Gen Z, as the AI trend picks up. Many Gen Z investors might end up investing via this route, especially when it comes to individual stocks. How do you see this trend panning out in the next few years? See, I think anything that adds variety to the market is always welcome because it's all part of making the markets more and more efficient. Anything that helps better exploit imperfections, and more importantly, overcomes human judgment, is beneficial. I haven't come across very many successful strategies yet, especially using AI. I think a lot of automation is often misunderstood as AI. So, I haven't seen many models or practices actively following this. But I'm sure it will add vibrancy to the market, and it's definitely going to play a role in exploiting any imperfections. So, I'm quite excited about it, if you really ask me, even though I haven't seen much happening yet. Let's also get your view on IPOs. We've talked a lot about IPOs. What's your take on some of the new IPOs that have recently hit D-Street from various sectors such as FinTech, EV manufacturing, and some of the new-age companies that got listed in 2021, which are now showing signs of greener pastures? What are your views on that? See, I think in 2021, there was a lot of excitement, so these companies were bid up, and then there were some disappointments, so they got thrashed. I think they experienced both extremes. First, it was like "all trees will grow to the sky," and then it became the opposite. We have always been selective investors. WhiteOak has had exposure to a lot of these new-age companies right from 2021 on a selective basis. In recent times, holding on or buying further has actually helped us. Secondly, if you look at the last couple of years, the market wasn't focused on cash flows; it was only focused on order books and cyclicals. So, one factor is the timing in 2021, the second is the individual company's performance. But the third important thing is that in the last two to three years, the market was against these segments. It was anti-anything with long gestation cash flows, preferring short-cycle cash flows because, when rates go up, the market prefers short-cycle businesses. So, the environment was loaded against these kinds of businesses. However, if you ask us, we've been high-conviction participants and will continue to participate in some of these new-age businesses. The reason is that many of them are B2C. Traditionally, B2C companies have deep ownership and integration with their customers. They have their own moats, built over time. So, it behooves long-term investors like us to look at them very closely. Simply saying that they are making a loss is a lazy explanation. Traditional businesses, if you look purely on a cash flow basis, might set up a steel plant that remains in loss for 15-20 years, but you allow them to capitalize on their expenses and depreciate them over 15 years. For these new-age businesses, you don't allow them to capitalize on their expenses, so they can't depreciate anything, and thus they show negative cash flows. For any discerning investor, these are things you need to look at closely and iron out. Which sectors should one be looking at this point in time, especially after a rate cut? Are there any sectors you are overweight on? Let's quickly cover those areas as well. See, the short answer is that you should look at everything that has underperformed in the last three years. Why am I saying this? I'm serious when I say look at the last five years. Everyone thinks the market has gone up a lot, but there are two things I want to point out. Do not look at the market from the bottom of COVID. That will always give you a misleading reference point because the bottom of COVID is not a valid benchmark. For a few days, we thought the case fatality rate would be 5%, that a vaccine would take 10 years, and that banks would have 15-20% NPAs if the world remained shut down. So, for a short period, we lived in fear, and the market fell by 40%. If anyone uses the reference point of 8700 Nifty, of course, they'll conclude that in four years it has tripled and that it's too much. But 8700 is not a good reference point; it was just a temporary fear for a couple of months. The real reference point is pre-COVID, at 12,490. So, if you take the last four years or the last five years -- from 2019 to 2024 -- any time frame you choose, Nifty has doubled in five years. Even from pre-COVID, Nifty has doubled in four and a half years, and that is not a crazy or outlandish number. In the last four to five years, Nifty has performed in line with its EPS. So, the large-cap index or the overall market hasn't done anything crazy -- that's the first point. The second important point is which sectors to look at. If you examine the market, you'll find that half of it -- financials, IT, consumer, pharma, and chemicals -- has underperformed Nifty. Meanwhile, some parts of the market have given returns of 2-3x compared to Nifty. So, when someone asks which sectors to look at, I would say focus on whatever has underperformed dramatically since 2021. The large-cap index or the main frontline index is not crazily valued. You just have to lift the hood and see where you want to participate. (Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)

ETMarkets Smart Talk | Rate cuts signal weakening US economy, caution advised despite 'risk-on' sentiment: Aashish P Somaiyaa

Everybody views interest rate cuts very positively. However, I believe one needs to think a bit counterintuitively or with second-order thinking. The reason being that rate cuts and the magnitude of change in expectations can only occur with weakening economic data."Rate cuts typically occur with weak economic data. So, yes, on first thought, people might believe it's "risk-on," but it's usually accompanied by poor economic data, which one should expect from the US, and this could jumble up sentiment for a while," says Aashish P Somaiyaa, ED & CEO, WhiteOak Capital AMC. In an interview with ETMarkets, Somaiyaa said: "FII outflows might occur due to the negative outlook on US equities, and some market downside is expected. But with a lag, as currency dynamics shift, we should see significant FII inflows" Edited excerpts: It looks like the stars are aligned for a possible rate cut by the US Fed in the next policy meeting. Does this indicate a sort of "risk-on" sentiment for equity markets? Everybody views interest rate cuts very positively. However, I believe one needs to think a bit counterintuitively or with second-order thinking. The reason being that rate cuts and the magnitude of change in expectations can only occur with weakening economic data. Generally, rate hikes come with strong economic performance and the need to curtail price growth and inflation. Conversely, rate cuts typically occur with weak economic data. So, yes, on first thought, people might believe it's "risk-on," but it's usually accompanied by poor economic data, which one should expect from the US, and this could jumble up sentiment for a while. Absolutely. For India, FIIs have been net sellers, at least in the cash segment of the Indian equity market, so far in August. Will a rate cut have any impact on the flows for the rest of FY25? There's no fixed or predictable playbook here, but I'll tell you what I think, based on past observations. As I mentioned earlier, rate cuts generally come with poor economic data. Take March 2023, for instance. When Silicon Valley Bank, Signature Bank, and a few other institutions collapsed, many expected a scenario similar to the Lehman Brothers crisis, believing the US financial system would experience a domino effect. Back then, the expectation was for three rate cuts in 2023 because people believed the US economy would rapidly weaken. Initially, when this news broke, their markets declined, and our market followed suit. If you recall, we dropped from a high of 19,000 to around 16,700 in March 2023. The first reaction was that their market declined, and globally, all markets tend to correlate during such panics or crises. Then, as the expectation for rate cuts grew, we saw the dollar index fall to 102, with the anticipation of rate cuts building. Typically, when there's a growing expectation for rate cuts, the dollar weakens, which usually helps emerging market currencies stabilize, often followed by FII inflows. So initially, I think FII outflows might occur due to the negative outlook on US equities, and some market downside is expected. But with a lag, as currency dynamics shift, we should see significant FII inflows. Let's talk about the recently launched arbitrage fund, which will open for subscription on August 28th. What is the investment philosophy behind it, and why launch it now? Launching an arbitrage fund isn't so much about timing, but rather about offering a product that meets investor needs. People nowadays prefer to park short-term surpluses, perhaps for six months to a couple of years, and arbitrage funds have become a preferred category. These funds don't take active equity risks; all long positions are matched by countervailing short positions in futures. Essentially, they generate returns from the spread between current prices and futures, making them more of a fixed-income surrogate. From our perspective, it's about rounding out our product range. Investors, advisors, and channel partners who work with us mainly for our equity offerings also expect us to offer products for parking short-term surpluses. Many have expressed a need for an arbitrage fund, so they don't have to go to different AMCs for different products. Those who want to stay invested with WhiteOak would prefer we offer an arbitrage fund so they can park their surpluses with us from time to time. FIIs pulled out around 15,000 crores from financial stocks in the first fortnight of August and chose to raise exposure to defensive sectors like healthcare, FMCG, and consumer services. What is your view on the financial space for the long term? Should investors put fresh money in now? When it comes to financials, a lot of attention is obviously focused on private sector banks, particularly the big ones, because they have been underperforming -- such as HDFC or ICICI. ICICI, of course, has done relatively better, but the general sense is that private sector banks, in general, have been underperforming. There is some pressure with deposit rates and net interest margins, and one has to figure out how much of this is cyclical and how much is structural. The key point is that more and more savings are going into capital markets. This shift impacts the banking system, especially in terms of how much money stays in the form of fixed deposits and what kind of pressure it creates on FD rates from a long-term structural perspective. We still need to see where NIMs settle and how banks compete in this environment. The long-term trajectory is still being worked out. However, if you ask me about financial services overall, we are very bullish. In the last few years, financial services have expanded beyond just banks. For example, we run a BFSI fund, and I can tell you that about 25% to 30% of our portfolio consists of non-lending financials, including asset management, wealth management, broking, exchanges, depositories, fintechs, and insurance companies. So, we are very bullish on financial services as a whole. For private sector banks, we'll have to see how they navigate this turning point in the next couple of quarters. How do you assess the IPO market, where most listings are making handsome gains for investors? Are you seeing any froth or overexuberance at this point in time? If you ask me where we are in the market cycle, IPOs are a necessary "evil." On one hand, we are seeing huge domestic flows, and on the other hand, we are concerned about valuations. One way to manage valuations and spread the flows is to ensure that IPOs and capital-raising efforts get expedited. In fact, I hope more large IPOs come in so that the money supply gets absorbed, and the existing stock of investments doesn't become crazily overpriced. So, big IPOs are absolutely welcome. I understand the concern behind the question, which is related to valuations and exuberance. This is something investors should be cautious about. Whenever there's a small company or a narrow segment of a sector involved, people should exercise caution to avoid overpaying. Sometimes, in moments of exuberance, narratives can overshadow numbers. If you ask me, for institutions like ours, IPOs have been a great opportunity to participate over the last four to five years. The private equity culture in India is now about 15 years old, and many companies that go for IPOs have had private equity investors for 10-15 years. They've been through various audits and governance checks. So, while there will be both good and not-so-good companies, the overall quality of IPOs today is much better than it was a few years ago, largely due to the institutionalization of private equity. Some excellent businesses in sectors like hospitals, defense, financial services, chemicals, electronics manufacturing, and diagnostics have started listing in the last five to six years. From an institutional perspective, IPOs are a welcome move. However, from an individual investor's perspective, there's always the risk of getting carried away by narratives. So, while IPOs are a good opportunity, everyone needs to do their own risk assessment. But the good part is that the quality of IPOs has improved, hasn't it? Absolutely. There's some old-world wisdom that says to stay away from IPOs because promoters are selling, investment bankers are pushing, and it will be fully priced. Now look, there's no point in stating something that's obvious, right? I mean, if you or I want our company to get listed, we'd expect a good price for it. There's nothing secret about that. But it's up to us to do our due diligence and factor in future prospects. That said, the quality of IPOs has dramatically improved. This is not the 1990s. Have you also increased your cash holdings to invest on dips given the geopolitical tensions in the past three or four trading sessions? Other than the perfunctory amounts, we don't really have a strategy to hold a lot of cash in our portfolios. However, if you want to understand how a fund house thinks about valuations and what models they follow, you can look at what balanced advantage funds or multi-asset funds are doing. These are a good indicator. If we're managing a multi-cap fund, flexi-cap fund, or large-cap fund, we aim to beat the benchmark through a factor-balanced portfolio and stock picking, not by taking cash calls. To get a sense of how we view valuations, you can look at how much equity our multi-asset or balanced advantage funds are holding. For instance, in our balanced advantage fund, which can hold between 30% and 80% in equity, we're currently at about 51%, indicating that we're in a fair value range. We don't think the market is particularly cheap. Similarly, our multi-asset fund, which has a range of 15% to 45% equity, is currently at about 25-26%. This suggests the market is in a stock-picking zone. It's reasonably valued, and you need to exercise caution while strictly following your asset allocation. So, which sectors could be a dark horse in FY25? I think we're already seeing sector rotation happening gradually. If you look at the last 30 to 45 days, there's been a noticeable shift. For example, while everyone is focused on manufacturing and defense, I believe... Atmanirbhar theme, the Make in India theme? Absolutely. I've always believed that our product launches should be countercyclical rather than procyclical, purely because investors should have a positive investing experience. Now, here's something surprising: I think in the last three months, our pharma fund must have outperformed the defense and manufacturing funds. This is an example of how rotation is already happening. It's difficult to pinpoint specific dark horses, but what I'm observing is that there are days when IT companies outperform, days when pharmaceutical and chemical sectors outperform, and days when large consumer companies outperform. So, there's clearly an ongoing sector rotation. Investors risk being overweight in small-cap, micro-cap, defense, manufacturing, PSU, etc., while the market action is shifting. On many days, large caps clearly outperform small and midcaps, and defensive or so-called secular sectors have been outperforming cyclicals. Sector rotation is underway, and when there's a belief that US interest rates will go down, discounting factors and growth versus value dynamics will also shift. Now, SIPs touched 23,000 crore last month, and that is a huge number by any means. It is definitely helping our markets remain stable despite FII selling. At the same time, do you think it is pushing stocks into the expensive category? See, the reason I mentioned IPOs is because, ultimately, demand needs to be met by supply, and that is the best way to keep prices and valuations in check. So, that is clearly one factor. Apart from that, if you ask me, for any investor -- whether an advisor or otherwise -- what is considered expensive or not is relative. If you're an investment advisor, determining your clients' asset allocation -- how much equity, how much debt, and which type of fund within equity -- that's the advisor's job. When you come to a fund manager, it's our job to diversify portfolios, identify which sectors are overvalued, which are undervalued, and where to be overweight or underweight. That's part of our day-to-day job. So, like at any other time, even today, on a relative basis, some parts of the market are more attractive, while others are less so. That process continues. What people should keep in mind is that any fund manager or asset allocator, when considering liquidity and the fact that Indians are restricted from investing outside India, must factor that into the equation. If I tell you that the market is going up solely because of liquidity, that would be a lazy explanation. There are many other factors involved. Let's talk about another asset, gold. We've seen quite a bit of action there as well. What are your views on this asset? Should investors raise their allocation toward this precious metal? I feel that gold should either be a serious part of your investment portfolio, or, as in many cases, it should just be ornamental. Half measures don't work. Let me give you an example: in our industry, there's a category called multi-asset funds. Now, most of these multi-asset funds hold around 10% in gold. But if you have a fund with 50%, 60%, or 70% equity, then 10% gold is ornamental -- it's not going to play any significant role. If you take a multi-asset fund as a proxy and look at customer asset allocation, my view is that you should either have 20% gold in your portfolio or none at all. I'll tell you why. We all have gold at home, but that's ornamental. I'm talking about deliberately buying gold, whether it's physical gold, certified gold, or gold ETFs -- that's your choice. From an asset allocation perspective, many calculations suggest that you should have gold in your portfolio because it has a low or negative correlation with equity. But here's the interesting part: those correlation equations are only relevant when you have equal amounts of gold and equity. When you have one rupee of gold for every one rupee of equity, those past correlations work. I can show you plenty of correlation data to prove that, from an asset allocation perspective, you should have gold in your portfolio. However, if you buy my logic but then invest seven rupees in equity and only one rupee in gold, will that one rupee of gold play any role in curbing the volatility of seven rupees of equity? The answer is no. So, if you're genuinely a conservative investor who wants to reduce volatility, you must have 20-25% of gold in your portfolio or something else that can counterbalance the volatility of equity. What I find is that many people don't have gold in their portfolios at all, and that's perfectly fine. I assume they are aggressive investors. But what I find funny is that some people do have gold in their portfolios, but it's only 2%, 5%, 3%, or 4%, much less than 10%. In that case, it's just for emotional peace of mind -- it's not going to play any meaningful role in the portfolio. Let me also talk a little bit about Gen Z, as the AI trend picks up. Many Gen Z investors might end up investing via this route, especially when it comes to individual stocks. How do you see this trend panning out in the next few years? See, I think anything that adds variety to the market is always welcome because it's all part of making the markets more and more efficient. Anything that helps better exploit imperfections, and more importantly, overcomes human judgment, is beneficial. I haven't come across very many successful strategies yet, especially using AI. I think a lot of automation is often misunderstood as AI. So, I haven't seen many models or practices actively following this. But I'm sure it will add vibrancy to the market, and it's definitely going to play a role in exploiting any imperfections. So, I'm quite excited about it, if you really ask me, even though I haven't seen much happening yet. Let's also get your view on IPOs. We've talked a lot about IPOs. What's your take on some of the new IPOs that have recently hit D-Street from various sectors such as FinTech, EV manufacturing, and some of the new-age companies that got listed in 2021, which are now showing signs of greener pastures? What are your views on that? See, I think in 2021, there was a lot of excitement, so these companies were bid up, and then there were some disappointments, so they got thrashed. I think they experienced both extremes. First, it was like "all trees will grow to the sky," and then it became the opposite. We have always been selective investors. WhiteOak has had exposure to a lot of these new-age companies right from 2021 on a selective basis. In recent times, holding on or buying further has actually helped us. Secondly, if you look at the last couple of years, the market wasn't focused on cash flows; it was only focused on order books and cyclicals. So, one factor is the timing in 2021, the second is the individual company's performance. But the third important thing is that in the last two to three years, the market was against these segments. It was anti-anything with long gestation cash flows, preferring short-cycle cash flows because, when rates go up, the market prefers short-cycle businesses. So, the environment was loaded against these kinds of businesses. However, if you ask us, we've been high-conviction participants and will continue to participate in some of these new-age businesses. The reason is that many of them are B2C. Traditionally, B2C companies have deep ownership and integration with their customers. They have their own moats, built over time. So, it behooves long-term investors like us to look at them very closely. Simply saying that they are making a loss is a lazy explanation. Traditional businesses, if you look purely on a cash flow basis, might set up a steel plant that remains in loss for 15-20 years, but you allow them to capitalize on their expenses and depreciate them over 15 years. For these new-age businesses, you don't allow them to capitalize on their expenses, so they can't depreciate anything, and thus they show negative cash flows. For any discerning investor, these are things you need to look at closely and iron out. Which sectors should one be looking at this point in time, especially after a rate cut? Are there any sectors you are overweight on? Let's quickly cover those areas as well. See, the short answer is that you should look at everything that has underperformed in the last three years. Why am I saying this? I'm serious when I say look at the last five years. Everyone thinks the market has gone up a lot, but there are two things I want to point out. Do not look at the market from the bottom of COVID. That will always give you a misleading reference point because the bottom of COVID is not a valid benchmark. For a few days, we thought the case fatality rate would be 5%, that a vaccine would take 10 years, and that banks would have 15-20% NPAs if the world remained shut down. So, for a short period, we lived in fear, and the market fell by 40%. If anyone uses the reference point of 8700 Nifty, of course, they'll conclude that in four years it has tripled and that it's too much. But 8700 is not a good reference point; it was just a temporary fear for a couple of months. The real reference point is pre-COVID, at 12,490. So, if you take the last four years or the last five years -- from 2019 to 2024 -- any time frame you choose, Nifty has doubled in five years. Even from pre-COVID, Nifty has doubled in four and a half years, and that is not a crazy or outlandish number. In the last four to five years, Nifty has performed in line with its EPS. So, the large-cap index or the overall market hasn't done anything crazy -- that's the first point. The second important point is which sectors to look at. If you examine the market, you'll find that half of it -- financials, IT, consumer, pharma, and chemicals -- has underperformed Nifty. Meanwhile, some parts of the market have given returns of 2-3x compared to Nifty. So, when someone asks which sectors to look at, I would say focus on whatever has underperformed dramatically since 2021. The large-cap index or the main frontline index is not crazily valued. You just have to lift the hood and see where you want to participate. (Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)