Invest in Equities if You Can Hold On to Them: Nirmal Jain, Chairman & Founder, IIFL

In a chat with ET Now, Nirmal Jain, Chairman and R Venkatraman, MD, IIFL Group, says good returns will be made in equities in the next two-three years primarily because real estate will find it difficult to give good returns. Edited excerpts:
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ET Now: Can you give a perspective on the market over the last two years and say how it is going to be in the next two-three years?
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Nirmal Jain: Before discussing what has happened in the market in the past two years, I will give you some background. People were sceptical because every time they thought that market was giving a bull call, they started crying wolves and actually the reverse of it happened. I think that things are now changing for sure and I am very bullish on the market from one-two year perspective.
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There will be problems in the global arena and in the developed countries. There are concerns about monsoon, the speed of reforms and the government's political ability to get the bills passed through Rajya Sabha. Although, they have managed to get a few bills passed in the last few days, things are changing for multiple reasons.
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One is that inflation is down and the economy is picking up. The government has now got into execution mode and reforms. We are seeing that whatever we were waiting for last two years are happening in the road sector, in the power sector, in railways and they are happening even at policy level. The income tax is now cleaning up. Some of the ministers who are new have got hang of the bureaucracy as well as the political system and the intent was always there. So that is a good news and I think with some bit of luck and if monsoon is good and by law of natural average also should be good because we had two bad monsoons in the last two years.
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So, if monsoon is good and things are turning around at ground level, then we will see that the macro variables become better and economy start moving up faster and then in the light of the rest of the world not doing too well including China. India will become a preferred destination for foreign capital along with the domestic savings flowing in, which as we have seen in last two years has been more forthcoming for the stock market and other financial instruments.
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ET Now: Nirmal has painted the big picture. Why don't you fill in the colours. If the trajectory is higher, how should one participate and when I say index, how should they participate?
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R Venkatraman: As Nirmal said, we are in for good times at least on the stock market. So the best way to play it would be to look at largecaps which will directly benefit from this revival in the economy. So the commercial vehicle cycle will return and that is one sector which when a cycle turns, it lasts for a longer period of time. So Telco, Ashok Leyland are good stocks. May be, you can look to buy some auto ancillaries to play the CV revival cycle. Bharat Forge may be out of fashion but you can still look at it along with Jamna Auto, Automotive Axles and Wabco in Chennai. Second thing is financial services, I think....
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ET Now: Buy NBFCs?
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R Venkatraman: Yes, buy NBFCs or buy banks and if you are more capable of taking risk, I would say may be PSU banks like SBI which has been beaten down.
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Then consumption remains a big theme because disposable income will increase and the likes of Hindustan Lever and Marico should do well. These are the three big themes and the fourth is construction companies as construction activity picks up. I think cement will do very well and something like ABB should do good because capital formation which had taken a back seat for the last three-four years again will start. We have seen all these things happening in the past. When the economy turns, everything falls into place. So these are things I would say people can look to play during the revival.
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ET Now: Is it time to hunker down equity return expectations because interest rates are coming down both locally and globally and equity return is always a function of the cost of borrowing. If the cost of borrowing has come down, obviously the net return would be lower whereas it is important to be bullish and it is good to be optimistic but shouldn't one be realistic on your returns?
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Nirmal Jain: I agree with you. A very interesting thing which has happened only for the first time in the last so many years is that the nominal GDP growth rate is slower than real GDP growth. It is optically making things look worse because say if your real GDP growth is 8 per cent and nominal is 12-15 per cent, then our monetary income, salaries, wages everything we see in terms of 13-15 per cent on an average that is the national income as we see it.
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Now that is becoming 7-8 per cent but what it is hiding is that even most of the goods and services -- I am not talking about food -- that we buy are also cheaper and it is with that perspective that expectation of equity returns the way we see it in developed markets are lower I think we will have to set lower target as well. So, if in the next three to five years, interest rates comes down to 6-7 per cent, 5-6 per cent may be and equity return and 10-12 per cent will be fantastic return. If you go and talk to a developed country like Japan or us or say UK, the expected returns are 3, 4, 6 per cent.
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ET Now: 6 per cent is a dream number...
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Nirmal Jain: Yes, dream number. We are also moving towards that. We are moving towards that.
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ET Now: Let me get closing comments from you...
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Nirmal Jain: It may be 12 per cent may be in the first term not 6 per cent...
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ET Now: But Venkat it is interesting that if I look at the average historical returns the equity markets have given in the last three years, we are below the average historical return. So, in the next three years, before we average out and before equalisation happens, is there case for serious outperformance in equity as an asset class because real estate is not going anywhere, gold is unlikely to have given a CAGR return of 10-15 per cent, fixed income interest rates have come down... they may come down by 100 bps or 150 bps. But will the chunk of the money in next two-three years be made in equities?
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R Venkatraman : I completely agree with you. I think that the good returns will be made in equities in the next two-three years primarily because real estate will find it difficult to give good returns and interest rates are falling so even if you factor in the capital gains, still I do not think they will give more than 10 per cent. If you are lucky, I guess will get 10-11 per cent. So equities is the asset class to go to in. Our recommendation to investors is to increase allocation to equities.
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ET Now: So two decades ago when you guys met you met at a vada pav stall. Things have changed, times have changed. So when do you meet now in the board room for lunch do you still eat a vada pav?
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Nirmal Jain : To be very honest not much. We have given up vada pav for a long while now but suppose we are passing a good vada pav and we are going to Lonavla or whatever, then we still enjoy vada pav.
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Source: The Economic Times