‘Equities should account for no more than 5-10 %of an individual’s disposable net worth’: Shankar Sharma

After a brief ceasefire, gold and oil prices moderated, but the conflict in the West Asia has flared up again. With India’s GDP growth expected to remain strong, do you see Indian equities performing better?

One would like to believe so, but the data remains sobering. Oil prices fell nearly 30 % after the ceasefire announcement, yet the rupee barely appreciated before slipping back to record lows as tensions resurfaced. Oil prices are rebounding and the rupee is once again at fresh lows.

In an ideal scenario, the rupee should have appreciated to around 92 against the dollar after hostilities ceased. The currency’s behaviour tells you what the market expects.

Even though India’s current account has improved, the rupee has failed to reflect the improvement in the macro environment.

In my view, India’s external position remains fragile. Much of our foreign exchange reserves are “rented” rather than “earned”, as they are backed by returnable liabilities. That limits their ability to provide durable support to the currency.

Another concern is India’s trade agreements with major economies such as the US, the UK and the European Union. There is a misconception that these agreements are automatically beneficial. In reality, trade deals are designed to reduce the exporting country’s trade surplus with the importing bloc. Since India runs surpluses with these regions, these agreements are likely to erode those surpluses over time.

I believe the currency market is already pricing in these risks, which explains why the rupee has not strengthened despite lower oil prices. Since equities are influenced by the currency and the broader macroeconomic environment, I do not think we are out of the woods yet.

As for gold, short-term price moderation is not particularly significant. Such corrections have occurred repeatedly over the decades. The more important question is where households can safely park their savings.

You have argued that systematic investment plans (SIPs) should be discouraged because they provide foreign portfolio investors (FPIs) with an easy exit. Yet SIPs have created wealth for many investors over the long term. Do you see that changing?

My concern is not with SIPs as an investment mechanism but with encouraging the average Indian household to invest heavily in equities.

For more than 30 years, I have argued that equity markets are not the ideal destination for the savings of most Indian households. Equities are better suited to richer economies where citizens enjoy strong social safety nets and can afford to take investment risks. In India, where financial security is limited for most people, allocating a large share of savings to a volatile asset class is risky.

Supporters of equity investing often cite long-term returns of around 14% annually over three decades. But those averages mask the fact that a disproportionate share of returns came during just a few years — primarily the 2004-07 bull market and, to a lesser extent, the 2020-24 rally. The impressive long-term average is heavily influenced by these relatively brief periods.

So what are your concerns?

The problem is that equities are increasingly marketed as a source of predictable long-term returns when, in reality, returns are highly uneven and accompanied by substantial risk.

The surge in retail SIP inflows is creating an unintended transfer of wealth from Indian households to foreign institutional investors by providing them with a convenient source of liquidity to exit the market. India, as a capital-deficient economy, should ideally be attracting foreign capital rather than facilitating its exit.

I do not expect policymakers to discourage equity inflows because the wealth management and mutual fund industry is influential, whereas alternative savings avenues, such as gold, lack a comparable organised constituency.

What is your advice to retail investors if markets remain subdued?

Equities should account for no more than 5-10 %of an individual’s disposable net worth. They should not be viewed as a source of steady or predictable returns.

Investors must recognise that high returns come with high risk. Marketing campaigns often emphasise the upside while underplaying the volatility. That is understandable from the perspective of the wealth management industry, whose business depends on attracting assets. But investors need to remain realistic about the risks.

How much correction would bring foreign portfolio investors (FPI) back?

It is not simply about valuations. A change in fundamentals — particularly India’s growth outlook relative to competing markets — will matter more.

Many global funds are currently underweight India relative to their benchmarks. At some stage, those positions are likely to be normalised. That could happen if technology-heavy global markets weaken, especially since India has relatively limited exposure to the technology sector.

That said, I do not believe foreign flows determine market direction. My long-term statistical analysis suggests there is little correlation, let alone causation, between FPI flows and domestic market performance. The belief that foreign flows drive Indian equities is an appealing narrative, but the statistical evidence does not support it.

Artificial intelligence has disrupted the Indian IT sector. Do you expect further downside?

The downside in absolute share prices may be limited, but IT companies are likely to continue underperforming the broader market.

This is part of the natural evolution of business. Many successful companies eventually exhaust their growth opportunities. Examples such as IBM and General Motors show how difficult it is for large organisations to reinvent themselves, especially when doing so requires disrupting their own business models.

Where do you see value in the Indian stock market?

The Indian market remains extremely expensive. Even average companies with attractive growth stories trade at 30-10ox earnings.

The danger with such valuations is that even if earnings continue to grow, valuation multiples are likely to contract. Over a three- to five-year period, investors may see little share price appreciation despite healthy earnings growth because much of that future growth is already priced in.

One enduring truth about markets is that investors consistently overpay for growth.

Many new-age companies understand this well. They come to market with aggressive IPO valuations, deliver some earnings growth and continue attracting investors despite stretched multiples. Much of this demand comes from retail investors, either directly or through mutual funds.

Most of these companies are not technology firms in the conventional sense. They are app-based businesses operating in traditional sectors such as retail and delivery. Comparable companies in global markets often trade at valuation multiples that are 50-80% lower.

Unless one believes India deserves permanently higher valuations than the rest of the world, many of these companies are unlikely to generate attractive long-term returns and could ultimately destroy shareholder wealth.