Volatility and momentum, I mean, are not they joined at the hip because if there is momentum, there would be volatility. So, your whole idea that there is going to be momentum and low volatility, how does that work and can you enumerate like an example that where it has worked in the past?
Vetri Subramaniam: So, momentum actually is a high volatility factor. If you see historically relative to markets, it has typically got higher beta.
It has got higher volatility. Now, when we say alpha low vol, it is low volatility, so it is looking for those companies which have low volatility retail relative to the market. So, in a sense it is a self-balancing equation because it is matching companies which have high alpha or high momentum with companies that have low volatility, so the aggregate portfolio ends up creating much better risk adjusted returns.
There could be periods of the market in which you want to be 100% momentum and that will be the best strategy to run with at other points you might want low volatility, that will be the best strategy to run with.
Here the two are getting combined, so they are in a sense counterbalancing each other and as I said again, risk adjusted this is one of the factor strategies which has very strong outcomes.
Wanted to also understand your outlook then when it comes to the overall fund flows given the fact that that has definitely been fairly disconcerting. While the DIIs have managed to keep our markets prop to a certain extent, the FIIs have been amiss to say the least. What is your outlook as to where the FII flows or the liquidity situation is headed?
Vetri Subramaniam: Well, that is a good perspective and again I go back to where I started my career and we thought tracking flows were what determined markets. But honestly eventually it is earnings that determine where markets go. Just because the industry puts out a monthly number for what the flow into mutual funds is does not mean that that is the only factor which drives the market. Remember, on the other side you have got massive supply coming through, whether it is QIPs, whether it is offer for sale, whether it is promoter selling down stakes in their companies, PE funds selling down stakes in their companies. So, I know we talk a lot about SIP and that is great for development of the capital market, but remember there is equally strong pipeline of supply of stock coming through on the other side. So, I will eventually submit that if you want to understand what will happen to equities, there are two parameters that really matter. One is valuations and the second is long-term earnings growth. It is not about the flows.Let us understand that three years out which are the sectors which you think can give a 12% to 15% compounded growth.
Vetri Subramaniam: Honestly, that is not an easy one because 12% I would say is sort of the long-term number that we would build into equity portfolio outcomes and given where we are in terms of valuation, the largecap valuations are reasonable. I would not say they are attractive, they are reasonable, so maybe in the largecaps you could talk about a 12% trajectory, but perhaps it could be slightly lower than that and where I would be quite concerned is on the mid and smallcaps because over there the valuations are still very-very rich and relative to that 12% number I think the outcomes can be disappointing. The one sector where we do think there is scope for absolute positive returns, I do not know about 12% or 15%, but that would be the banking and finance sector where we think the balance sheets are strong. The scope for growth remains good.
Lot of negative news around, but that is why you are getting the valuations at attractive level and cheap valuations determine the outcomes a lot more than narrative, so that is the one sector that I would be willing quite happy for absolute returns right now.
Where are you on these big themes — energy transition, EV transition, everything in the solar world is getting re-rated like the consumer names? Is there excitement and is there a bubble in making in some of these energy so-called themes?
Vetri Subramaniam: It comes back to understanding what exactly drives the long-term competitiveness of these businesses. If all you are doing is putting capital together to buy equipment, there is no technology element to that, then you are a pure utility.
If you are a pure utility, then eventually I am pretty much contrarian here because most people these days are happy to pay a PE multiple for utility stocks, but I have learned the hard way that in the utility business, what you can pay is really price to book because eventually the regulations cap the ROE potential of those businesses.
So, I am surprised by the fact that the stock of energy transition in companies which are going to have to invest significant amounts of capital just to stay relevant, people are now willing to pay such a big premium.
I would not say we can completely ignore that area because like it or not the energy transition is going to happen. But I think you have got to pick your names and be a little bit slow over there. There will be better buying opportunities in terms of valuations is the way I would describe it.
Everybody is excited about banks, I mean that is one space where there is a consensus view of comfort and growth, but that consensus view is just not helping investors because banks have been in this hibernation at least the private banks for three years now. Do you think 2025 could be that turn for the banks?
Vetri Subramaniam: Again, I am not good at predicting exact dates when these things turn, but I have been horribly wrong about mid and smallcaps which have still done spectacularly year to date, has not changed the fact that I was negative about them a year ago. I have been positive on banks for this entire year. They have not done anything, but that is perfectly fine. When you think about this investing journey, it is about three years and five years and believe me in those journeys, what matters more than anything else is are you getting solid companies at reasonable valuations?
If you do that, that takes care of a lot of the risks associated with investing. So, I am very comfortable being wrong. Some of my best investments, sectoral, thematic, stock level, have had my best outcomes over five years and ten years but for the first year, maybe even two years, I was horribly wrong and contrarian but I am fine with that because I am in this for the much longer term.