Bazaar & Beyond: Markets, Volatility & Long-Term Investing

Vivek Ananth: Hello everyone, and welcome to another episode of Bazaar & Beyond.

In this episode, we discuss the current market environment, including global volatility, rising oil prices, interest rate uncertainty, foreign flows, and what all of this could mean for Indian markets and retail investor portfolios.

Joining us today is Rakesh Vyas, Chief Investment Officer at Quest Investment Managers.

Thank you, Rakesh, for joining us.

Rakesh Vyas on His Journey and the Current Market View

Vivek Ananth: I wanted to begin by asking you about your journey, your experience in the industry, and Quest’s broader view on what is happening in the markets today.

Rakesh Vyas: First of all, thank you so much for the opportunity.

To begin with, I started my career almost two decades ago as a research analyst at a foreign multinational on the equity research side. I then moved to the buy side with one of the large domestic mutual funds, where I spent close to 15 years. Around two years back, I joined Quest.

Quest has been an organisation in the market for more than three decades, and for close to the last two decades it has been active in asset management. We currently manage both PMS and AIF products.

I have been with the firm for two years now, and I would say the last two years have been fairly challenging, especially the last 18 months. Since around September 2024, markets have gone through a difficult phase, with some brief periods of hope in between, but largely pressured by the weakening traction in earnings.

We have seen meaningful derating in a number of stocks and even at the market level. As we entered FY27, there was hope that earnings growth would revive to more normalised levels.

If you look at the post-Covid period, we had three to four strong years of earnings growth, which helped drive the market higher. Historically, we have tracked long-term earnings growth at around 14% to 15%. But over the last two years, earnings growth has been far more tepid, closer to half of that.

On a quarter-on-quarter basis, we were expecting things to improve. Barring the recent geopolitical developments, we were anticipating FY27 to deliver around 12% to 14% earnings growth, and market returns were also expected to reflect that.

Right now, things are far more uncertain, especially with the conflict that has been ongoing for almost four weeks. Some of its repercussions have already appeared in energy markets, but the broader macroeconomic effects are still unfolding.

Given the changes around crude, currency, raw materials and possibly even demand, we may see some moderation in that earnings trajectory. But compared to the last two years, we still remain hopeful that FY27 could turn out better.

If you look at what is happening in the market currently, there has been a lot of selling, especially by FIIs. Valuations have corrected reasonably well. Even after considering the earnings cut, we now expect, we were probably trading at around 19 times FY27 and 17 times FY28 earnings. Broadly speaking, that is close to the mean level of multiples that we have traded at historically.

So, if earnings growth normalises, the market is fairly valued. That is how I would conclude it — reasonably well balanced, with pockets of opportunity across specific sectors and in the mid- and small-cap space, where the correction has been much sharper.

Is This a Different Kind of Market Phase?

Vivek Ananth: Markets have seen this before, because of the conflict you mentioned, the pressure on the currency, rate cut uncertainty and foreign outflows.

For a retail investor who entered the market only after Covid, this phase may feel very new. Perhaps they have already seen the Ukraine-Russia conflict and may feel slightly more familiar with such episodes.

So, are we in a phase where macro conditions are being affected in a different way? Or is the micro still stable, while external factors are impacting the markets and therefore feeding into macro concerns?

Rakesh Vyas: Yes, for someone who entered after Covid, the last three to four years have been reasonably good in terms of making money in the markets.

Macro conditions started weakening around two years back. The comparison between the Russia-Ukraine conflict and what we are seeing today is slightly different, especially from India’s perspective.

When the Russia-Ukraine war began, many thought it would be short-lived. It lasted much longer, but energy markets were not disturbed in the same way. In fact, India was better placed because we were able to purchase Russian oil at a discount, since that oil was not finding its way into other global markets.

Europe, on the other hand, went through significant turmoil because energy prices rose sharply there.

The West Asia crisis is different because it is impacting the global energy market more directly. Not only on crude, but more meaningfully on gas. India currently does not have enough opportunities to import gas from alternate sources at scale. The US and some other geographies are available, but it will take time for that adjustment to stabilise.

The point you raised around interest rates is also important. Last calendar year, we had fairly front-loaded rate cuts. A 125-basis point reduction in the repo rate was substantial. There was also an expectation that we would see more rate cuts this year.

Now, with energy prices rising and inflation risk coming back into the picture, there is a strong likelihood that we may not see meaningful rate cuts — not just in India, but globally as well.

So, we have entered a stage where macroeconomics is now pointing to somewhat higher inflation.

If you look at major economies that are energy importers, they are likely to face currency depreciation against the US dollar. India is no exception. In the last 12 months, the rupee has already weakened by close to 10% against the dollar.

That said, we were still expecting reasonable growth to continue because of the actions already taken by the RBI and the government. Since the previous Budget, income tax relief to the middle and upper-middle class, interest rate reductions, large liquidity injections by the RBI, and GST rate cuts were all aimed at supporting consumption.

That domestic consumption story remains strong in our view. So, while we may see some moderation compared to what we were expecting three months ago, we still believe growth should be better than what we saw in the last two years.

Valuations, Corrections and the India Premium

Vivek Ananth: You mentioned that forward multiples have corrected to around 19 times FY27.

So now that this correction has happened, do you think the market was waiting for some external event to reset? Does this create a good opportunity for long-term investors to enter?

And linked to that, do you think the idea of India trading at a premium versus other emerging markets still holds?

Rakesh Vyas: Yes, times like this do create opportunities to identify specific names that can deliver superior returns.

At current levels, I would say we are closer to fair value, though I would not say the market is very cheap. It still provides a better opportunity to look at the market more favourably.

As for the comparison to Covid, I would not call this a Covid-like situation yet from a macroeconomic perspective. If the conflict becomes prolonged and energy prices remain very high for a long time, then India could face much sharper macro deterioration. But we have not reached that stage yet.

A lot of corrective actions had already started taking shape last year, and some of those benefits are still likely to come through. GST rate cuts, for example, help to mitigate inflation risk. Without those cuts, we could have seen prices move back to earlier levels more sharply.

So overall, macro conditions are uncertain, but compared to where we were two years ago, we are still relatively better positioned.

On valuation premium, if you compare India with MSCI Emerging Markets ex-China over the past 15 to 20 years, India is now trading closer to, or even at a slight discount to, its average premium.

We were expensive around two years ago, but not so much now. At the same time, India’s long-term earnings growth trajectory has also been stronger than most other emerging markets ex-China, and that justified some premium.

The hope was that FY27 would see normalised growth. Other emerging markets may still have strong earnings growth in certain pockets, perhaps driven by concentrated sectoral stories, but on a broad market basis India is still trying to catch up after two weak years.

So, from a valuation perspective, we are neither very expensive nor very cheap.

Domestic Strength, Consumption and Private Capex

Vivek Ananth: There has been a lot of discussion around India’s domestic strength. Consumption seemed to be improving, GST collections remained strong even after the rate cuts, and there is some concern around private capex, perhaps because of global uncertainty.

Do we still have enough domestic strength to withstand persistent global weakness? And related to that, if so much wealth has been wiped out, does that not also affect the real economy?

Rakesh Vyas: That is a fair point.

If you look at the valuation premium correction, we are now more in line with global averages. But what matters more over the next couple of years is whether domestic strength can support earnings.

The government’s earlier focus, especially between FY19 and FY24, was heavily on infrastructure spending. As that growth moderated, the policy focus shifted towards consumption. The idea was that higher disposable income in consumers’ hands would stimulate demand, and that in turn would lead to more private capex.

That story still remains strong in our view.

Some of the data points we track, including credit growth in the banking system, have improved. Credit growth, which was tracking at around 8% to 9% for much of last year, has picked up to 12% to 14%.

If you look at the split across corporate, MSME and retail lending, it is retail that continues to drive this growth. And a large part of retail credit growth normally supports consumption.

Earlier, one could argue that some of the credit growth between 2023 and 2024 was also finding its way into the market, but that does not seem to be the case now, especially after regulatory actions.

So, in our view, the credit growth we are seeing today is more consumption-driven, and that remains a strong growth story for at least the next two to three years.

Why Asset Allocation Still Matters

Vivek Ananth: People like you and many others often say that asset allocation remains the mantra, especially in uncertain times.

But the challenge is that investors panic. And there are days when all major asset classes are down together, which makes the principle of asset allocation look ineffective in the short term.

How does one explain to investors that asset allocation still works?

Rakesh Vyas: As you rightly said, for investing and asset allocation, one has to take a longer-term view.

Just as there are periods when all asset classes can be down together, there have also been periods over the last four or five years when nearly all asset classes moved up together. Interest rates were going up, equities were doing well, precious metals were rising, and real estate prices were strong too.

Over a longer period, these anomalies tend to even out. A prudent asset allocator would still think of allocating across asset classes like equities and precious metals.

Historically, especially in India, equities have delivered better risk-adjusted returns than most other asset classes. But gold still makes sense as a hedge. Over time, patient capital in gold can also generate reasonable returns, and at certain points those returns may even match equities, though I would not generalise that.

The real question is the time frame. If you are allocating to real estate for end use, any time can be a good time. But for speculative purposes, one has to be clear about the risk-return objective and also the liquidity profile.

That is why equity, debt instruments, and gold remain core components of asset allocation. They provide relatively better liquidity, and in periods like this, investors can even think of gradually shifting some capital from lower-risk assets to slightly higher-risk ones in order to capture alpha.

But I would still argue that equity as an asset class gives better returns, provided the time horizon is long enough. The problem is that when people say long term, they may mean three, five or seven years, but then they compare returns every three months, six months or one year. That is something investors need to move away from.

A part of the portfolio can certainly be short term in nature, but one has to be very clear about the risk-return target there.

Should Investors Deploy Cash During Corrections?

Vivek Ananth: Now that markets are in correction territory, how should an investor think about whether to deploy cash, hold on, or sell?

It is very difficult to stick one’s neck out in times like this, especially when it is your own money.

Rakesh Vyas: That is a fair point, and I think most people would agree that both the top and the bottom are difficult to identify.

In times like these, the most prudent strategy is to continue investing in pieces.

You can argue that we may be closer to the bottom than we were two weeks ago, but nobody knows exactly. So, if you have a corpus to deploy, one way is to split it into four or five parts and invest with every 2% to 3% fall in the benchmark.

This way, you participate at current levels, and even if the market does not fall enough for you to deploy the final tranche, you still end up doing reasonably well because the market has recovered.

Markets are often driven by liquidity, and that remains difficult to predict. FIIs have sold more than ₹1 lakh crore already this month, which is a very high outflow. In such conditions, protecting prices is not easy, and better prices may emerge.

That is why a staggered approach works well.

The broader framework should be whether earnings growth and valuation are now correlating better. Two years ago, valuations were stretched relative to earnings, and it would have been easier to take some money off the table. Today, that equation looks healthier.

Market behaviour is also a function of greed and fear. When you are making money, you feel you have done a great job and want to continue. When markets correct sharply, fear takes over. But in times like this, staggered investing is probably the better strategy.

Narratives, Sectors and Valuation Reality

Vivek Ananth: Markets are often driven by narratives. A few years ago, it was platform companies, then electronics, more recently defence.

Do external shocks make these narratives go away, or do they continue to hold if the structural story remains intact?

Rakesh Vyas: Narratives are part of the market, yes. But the easier way to separate narrative from reality is to ask whether the narrative is backed by something tangible.

Take defence, for example. Globally, defence spending is rising. The current decade has seen much more geopolitical tension than the previous one, and that naturally drives higher defence budgets.

For India, that also ties into localisation. India has historically been a large importer of defence equipment. Policy initiatives have encouraged greater domestic manufacturing, more companies are receiving orders, and smaller companies are entering the ecosystem. So the theme is backed by actual government spending and policy.

Valuation, however, is a separate matter. Seven or eight years ago, many listed defence companies, most of them PSUs, were trading at very cheap valuations, sometimes single-digit earnings multiples. As the order books improved and execution picked up, those multiples rerated sharply.

So, I would separate the two. The narrative is what is being backed by spending, policy or consumption. Valuation is about what you are paying today versus the growth you expect tomorrow.

The same is true for manufacturing. Policy initiatives were meant to drive consumption, private capex, and eventually exports. PLI in mobile manufacturing started with assembly, but the broader aim was to create a value-added ecosystem. That ecosystem is now visible.

So, these structural themes remain strong. But one still has to judge whether the current multiples are justified by the likely earnings trajectory.

How to Separate Noise from Real Portfolio Risk

Vivek Ananth: How should long-term investors separate noise from things that genuinely matter to their financial goals?

For example, if someone is investing for retirement through a Nifty 50 ETF over 20 years, how do they remain calm in a noisy media environment and focus on the long term?

Rakesh Vyas: Markets are a mix of investors, traders and speculators. For traders and speculators, short-term noise can create opportunity. But for a long-term investor, the primary focus should be on identifying which stocks or businesses in the portfolio are actually impacted over the medium to long term by macro events.

Take rising crude prices. In the near term, they may affect many companies dependent on energy imports. But if one believes that crude prices will not remain elevated over the long run, then market corrections in such names may actually create buying opportunities.

At the same time, it is important to identify companies where these variables play a major role in future earnings. If you can identify that, then actions become easier.

For DIY investors, that does require some reading and learning. But over time, it becomes easier to separate pure noise from something that can genuinely affect long-term portfolio returns.

In times like this, it is prudent to review your portfolio once and then take a step back and let the situation play out. If new variables emerge, you can reassess. But short-term uncertainty will almost always be higher than medium-term uncertainty.

That is why it is easier to focus on how specific companies and portfolios are impacted by macro events, rather than react to headlines.

Do Investors Need a Mindset Shift?

Vivek Ananth:Investors who came into equity after Covid have seen a strong market and may have started seeing equity as some kind of guaranteed performer, even though it never claimed to be that.

Do such investors need a mindset shift?

Rakesh Vyas: Yes, I think so.

This environment is something many of them have not seen in the last five or six years. Those who came in post-Covid saw markets rising steadily, and making money was easier. That built a strong narrative around equity as an asset class, and I still believe equity remains a powerful wealth creator.

But one has to separate the time frame. Newer investors often have far more short-term return expectations than long-term ones.

From a long-term perspective, investors who manage their own money often start out like traders, but over time they evolve into long-term investors. That is also how wealth gets accumulated.

At the start, you have a smaller capital base and naturally want very high returns. But as you grow older and have more capital to invest, you become more long-term in your orientation. That is a journey many investors go through.

My view is that when you look at equity as an asset class, you should ideally look at it from a five, seven or ten-year perspective. It then becomes much easier to benchmark it against a financial goal. Over that time frame, equity is likely to deliver superior risk-adjusted returns versus most other asset classes.

People often want quick returns and therefore keep hunting for multibagger ideas. But multibaggers take time. Earnings need time to compound, and market multiples also take time to reflect that in the stock price.

Trying to find a multibagger that gives very quick returns in one or two years is not realistic every time. That may happen in a strong bull market, but not always.

So a large part of the wealth one wants to invest should be placed with a longer-term horizon. A small portion can always be used for tactical or trading ideas, but most investing should still be done with a five to ten-year view.

Book Recommendations and Closing Thoughts

Vivek Ananth: Last question are there any books, podcasts, films, or shows you would recommend that could enrich our viewers and listeners?

Rakesh Vyas: Yes. For those who are serious readers, The Intelligent Investor by Benjamin Graham is a very good book. It is slightly heavier but very useful for understanding markets and behavioural finance.

For a lighter read, One Up on Wall Street is excellent. What it really conveys is that you do not need to be highly technical in finance. You just need to be observant about how things are changing around you, and that can help you identify businesses and stocks early.

I would also recommend regularly reading good newspapers and quality news articles. That helps improve your information base. As I said, the more you read, the easier it becomes to separate noise from meaningful information.

Vivek Ananth: Thank you so much, Rakesh, for taking the time and sharing your perspective.

Rakesh Vyas: Thank you so much once again. I wish everyone success and great times in the market.

Vivek Ananth: Thank you, Rakesh, for joining us, and thank you to our viewers and listeners as well.

Clearly, disciplined thinking, clarity around market shifts, patience, and a long-term investing mindset remain crucial in environments like these.

Until next time, stay safe and invest wisely.

Disclaimer: Investments in securities markets are subject to market risks. Please read all related documents carefully before investing.