“Next weeks will be critical due to geopolitical risk and earnings.”

Last week, domestic stocks, which had been rising sharply, had one of their worst performances in memory as investors withdrew money from the market due to concerns over valuation and the worry that unrest might spread across West Asia. The Nifty dropped 2.5% to 22,147 points in the previous five trading days, while the Sensex dropped 2.1% to 73,088.33 points. The market will be closely watched in the next weeks, according to Kotak MF’s CIO Harsha Upadhyaya, even if it seems that tensions between Iran and Israel may not quickly worsen. In the next ten years, Upadhyaya informs Vivek Kumar M that he anticipates returns to moderate. Take-outs:

 

Because of the tensions between Israel and Iran, some correction has occurred. Consider if we are at the bottom.

Trying to forecast the market in the near term is never easy. It is evident that values are high, especially for small-cap stocks. For the foreseeable future, at least, attention will be focused on events in the Middle East and West Asia.

I believe that the markets will focus only on profits if it does not increase. But apart from profits, investors will be concerned about this more than anything else since oil is now trading at $89–90 per barrel. Few problems will arise if it rises over these levels. First, it goes without saying that our economy will not be as robust as current projections indicate. Additionally, company margins may suffer. Thus, the next weeks will be highly important.

Despite worries over valuations, small- and mid-cap stocks have shown to retain their footing. Furthermore, small-caps have done better than large-caps notwithstanding the tension between Iran and Israel. How do you interpret it?

In comparison to the big cap, the flow structure in the small- and mid-cap segments has been much greater. Furthermore, there isn’t a basic drawback there. There isn’t any drawback that is unique to India, except from the valuation risk. In light of the anticipated strong economy, a lot of individuals are placing bets on mid- and small-cap businesses, believing that they would do much better than large-cap firms over the course of the next three to five years. This is because large-cap companies have already reached a certain size and many of them may have international connections. For mid-caps, that percentage is lower.

However, the value is clearly higher and may cause a fall if there are any fundamental or emotional issues.

What do you think will happen to interest rates in the future and how will it affect markets if they continue to rise?

June doesn’t seem to be at the table right now. September is contingent upon the trend of inflation. Needless to say, how crude acts going forward will be crucial. When interest rates increased, stocks did not have a negative reaction. The interest rate by itself won’t determine the market as long as the economy is thriving and corporate profits growth is sustained. Since interest rates ultimately represent a cost of cash for operating a corporation. You will undoubtedly still make money even if you are able to make more than that.

All in all, it can sour some feelings. But it’s hard to say how much of a value adjustment there will be.

In the long run, say five to ten years from now, what do you anticipate from Indian equities?

Over the last 30 to 35 years, the Indian markets have yielded a return of around 13%, in addition to an additional 1 to 1.5% from dividends. That’s around 14%, then. Since our economy has grown significantly, I don’t believe you can anticipate the same growth rate over the next ten years. In addition, early on, the cost of capital was greater. In that sense, even if the returns were higher, there was also a lot of inflation. That is no longer the case.

Returns will most likely be moderated. However, I believe that the nominal GDP growth itself should be in double digits, at least for the next several years, given our growth rate of 7–7.5% and modest inflation. If so, a few of the businesses need to be able to provide services that are superior than that.