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bl.portfolio Recently we met Parameshwar Iyer Krishnan, Managing Director and CIO, Spark Asia Impact Managers, in Chennai. Krishnan primarily manages assets worth about ₹1,200 crore under two PMS strategies – Core and Satellite and Flexicap, which were launched in 2019. While his funds may be new, Krishnan is a veteran with over 34 years of experience in markets and fund management. profile P Krishnan, Managing Director and CIO, Spark Asia Impact Managers, has spent over 34 years in fund management and the Indian markets, including regional experience in Taiwan, South-East Asia and China. Worked at SBI Mutual Fund and Kothari Pioneer MF in the early 1990s A 19-year stint at DNB Asset Management, a branch of Norway’s largest banking and insurance group He holds an MBA and an Engineering degree in Computer Science from IIM Bangalore Edited excerpts from the conversation: In your recent interactions with investors you have said that things like the TINA factor and availability of liquidity are not sufficient conditions to sustain the equity rally and that there is a sense of complacency and entitlement among equity investors today. What are the factors in today’s markets that are worrying you? The concern is twofold. One is that many companies in the mid- and small-cap space, particularly those that have had IPOs in recent years and those that are entering the market now, are trading at valuations or market-cap levels without any logic in relation to earnings. Pricing is not happening based on any fundamental factor but on demand and supply. I am not saying all large-caps are reasonably valued or attractive. These companies have capital and in many cases are growing steadily. If the valuation goes up, you can say temporarily it is overvalued and if you have a similar performance for a certain period, it will even out. But in smaller companies, some of the newly listed companies are still not profitable. And in many cases, the nature of these businesses is also such that they are more ‘mono line’ where the vulnerability can be much higher. These are not factored into the market and so if things start to go wrong, they can go wrong with a multiplier effect on the downside. So, one must be cautious when making money on momentum. The other concern is that people are claiming that overall Nifty valuations are below 2021 levels and hence the market is not expensive. However, the number of stocks trading below the average is less. The disparity between why you do things and how things eventually happen can get us into trouble in the future. Of course, fundamentals remain strong and earnings growth has been robust post-Covid. But it is hard to define what a bubble is and most people know about a bubble when it is gone. I am not saying we are at the peak, but what we are trying to say is that you have to lower your return expectations from here on. Coming back to the issue of liquidity, we have seen that whenever there is a crisis, liquidity is pumped into the system which reaches the equity markets and supports them. Do you think the party will keep going as long as liquidity is available? If liquidity alone is expected to support markets, we should keep in mind what happened in Japan in the 1990s and how long it took for markets to recover. So far, the liquidity that has been unleashed after the global financial crisis or more recently Covid has helped. But liquidity alone has not created and sustained all (bullish) markets. In today’s context, a large amount of SIP money is coming from the middle and upper middle class who need to keep investing to meet their goals, but we still don’t know how people will react to an adverse event, which many new investors have not seen yet, after Covid. The Covid-induced downturn also lasted too short to test one’s mettle. Secondly, foreign investors always have options. People argue that FPI dependence has reduced, which may be partly true; but if there is a solid sell-off, FPIs still hold about a fifth of the market. India’s weight in the MSCI EM index is now 20-21 per cent while China is at about 25 per cent. When I worked for a foreign fund about two decades ago, India had a weight of about 4 per cent and China was double that. At that time, we said there is potential in investing in India because we have better fundamentals than other markets that had a higher weight at that time – like Taiwan, South Korea, Brazil, Russia, etc., and our weight was only going to increase. Now at this stage, the margins with China have come down. We must remember that the Chinese economy is still about five to six times bigger than our economy and we cannot rule it out completely. What are the areas in the market that you find interesting now? Insurance stocks are not in a bad position today. These are high-quality companies with good balance sheets. These are not small-caps and liquidity is also good. But these are companies that will help you get reasonable returns and not extremely high returns. I agree that banks are attractive now but the only thing we have to remember is that this is a cyclical sector, we have to determine where we are in the cycle. I would say we are in the middle of it right now and while you may not see dramatic improvements (in various parameters) going forward, you are unlikely to see deterioration either. So, I think there is more to come in the cycle and that will help re-assess the ratings of these banks, but in a reasonable manner. If you include average valuations, there is some scope for growth in the next two years. But it cannot happen with zero volatility because there are certain sectors in the asset mix which are seeing some stress and nowadays,