Let us understand your thoughts on the worries related to rising bond yields, sharp shortage of energy and the disruption. As a money manager, what are your observations? Can it derail the scope of a naïve bull run in emerging markets like India?
In the last 18 months or so, Indian equity markets have seen one of the strongest runs in the last decade or so. Now that the US bond yields are looking like going up, that could possibly lead to some kind of risk aversion or correction in markets. But I am going to call that a fairly healthy correction because as retail money managers, we see that there is plenty of money waiting to be invested and market corrections provide the opportunity for a lot of investors to come in and join the bandwagon. In any case, it is always healthy for markets to consolidate a bit after this kind of a rally and then start moving forward.
Can rising energy prices derail this kind of a rally? There are plays which are consumers of energy and there are plays which are producers of energy. If as a consumer of energy is getting impacted by rising energy prices, there is also a segment of the market that is benefiting from that and this acts as a balancing factor. In the last few months, we have seen a huge surge in commodity stocks which in a way is also reflecting on what has been happening in the markets. So can that derail the rally? Possibly not. But can that cause a pause in the rally or some correction in the markets? Possibly yes.
JSW Energy and Tata Power, the two power stocks have exhibited gravity defying moves in the last 6 months because they are talking the language of ESG and are moving their portfolios towards renewable energy, But other power stocks like Coal India, NTPC are also trying to move in that direction. How do you see the Indian energy play?Also, is more money coming to ESG related high scoring companies?
So as far as the energy trends are concerned, the world is moving towards cleaner forms of energy, which are environment friendly. Both solar and wind power are substituting thermal power. As far as automobiles are concerned, diesel and petrol are going to be replaced by electric vehicles in the future. In a way, the trend is very clear. In the Scandinavian countries, almost 50% to 60% of the vehicles which are sold currently are electric.
Now coming to the bigger picture on ESG, globally concerns around environment and social inequity have grown considerably. As a result, governments as well as some of the multilateral agencies have been taking a lot of steps and coming up with various protocols to try and see what they can do for the society and the environment as a whole.
In this context, we as institutional money managers can in the process positively influence our investee companies in becoming socially and environmentally more responsible. Historically, whenever we uses to invest, governance was the primary factor which we used to look at besides business environment and dynamics. Now society as a whole and what you are doing to the environment have also become equally important. ESG investing is all about that.
Over the last 10 years, almost all ESG indices have outperformed the mainstream indices. So, if we behave as responsible investors and direct our savings in socially and environmentally more responsible companies, not only do we contribute to the betterment of the society and environment around us, it is possibly economically rewarding as well.
Where do you find risk reward to be attractive?
If you had asked me this question three months or six months back, I would have still said that the valuations are looking rich and therefore one should be prepared for a correction. But then that never really happened. So it is good to carry a mix of both debt and equity rather than carrying only equity and a balanced approach to investing would be a better option. Also instead of trying to put all money in one go it is good to average out and invest systematically given the current market levels.
If you are looking for an answer as to what will lead to corrections in the market, I would say that it will have to be first driven by global factors and only then, because of certain local factors we may see some kind of correction in equities. Till then enjoy the ride.