India's growth pain to last longer? | Aswath Damodaran To ET NOW

[Music] well the decade or gone by was essentially a great decade for equities the standout feature was central bank policy action a decline in interest rates and abundant liquidity the net impact was that interest rates in last ten years across the globe they came out and let's look at that what has been the real decline in interest rates because interest rates always act like grabs gravity and if interest rates they come down equity valuations always remain higher and focus on us stay near paper you may want to ignore 1999 but between 2009 and 2010 beginning the interest rates in America came down by two percent the German 10-year yields are negative now and India also interest rates between 2009 in 2019 they've come down marginally of course we have much mistake inflation equity markets responded to this kind of in scenario the crude evaluations went higher growth made a comeback and the US markets in a sense was the standout gainer while other may other markets may just look dwarfed in front of what S&P for the decade gone by has given and Nasdaq was almost 3x for the decade gone by so what is in store for this decade how should one value equities and assets in this decade if interest rates are low are we in this kind of a new environment now we discuss that to understand that to talk about valuations because ultimately markets are all about valuations I with me someone who is the foremost authority of valuing companies and businesses professor professor Aswath damodaran professor happy new year thank you for joining us so good to you know connect back with you hope you are enjoying the winters in US this year my first question to you professor is what I just talked about in the opening graphic we've just ended that decade and the decade gone by has been extremely good for equities as an asset class and US markets have given outlier returns emerging markets have also not not done bad bad so what is your sense for this decade equity as an asset class will it continue to outperform other assets there are a couple of things that are interesting because looking back it's been an amazing decade but if you look at it relative to the previous eight decades in the u.s. it actually falls right in the middle it's actually more it's closer to the median then it is to the highest of the laws so that surprises people because they look like if that must be this must be the best decade ever it's actually the fourth best decade over the last nine so the first thing is over the decade it's a very don't get me wrong it was a very good year decade for stocks but it was not so good that you know PI said it's never happened before the second is it is true that after a decade like last word the last one or the or a year like last year last year the US stocks are up 31% of you include evidence that you're less likely to see a really good year then you are likely to see a value it's just the nature of market what markets big markets off and take away doesn't mean next year is going to be a bad year it means that the odds of it being another 15 20 25 % year are very low which happened before but then lower than they would have been if last year it not been that great but it is true it's been a great decade for stocks then looking forward I wouldn't expect things to continue the way they are simply because markets don't operate that way so professor you always mention the importance of interest rates interest rates they act like gravity which is of interest rates they go higher valuations will always come lower interest rates cannot go down lower than this in Europe they are in negative territory now so one works with an assumption that interest rates somewhere in the decade will move higher what will that do to the underlying valuations of equities you know I don't disagree with it but after eight years you gotta stop and ask maybe this is not an aberration because of the last decade at least in developed markets people have been waiting for the other shoe to drop they look at rate and say there's no way rates can stay this low they have to go back but after about eight or nine years of the same phenomenon playing up and blaming the central bank's every time this happens maybe it's time you stopped and asked the question maybe this is the way it's going to be I think we live in a word and just the word that we live in for a long time of no rates and high risk premiums it's a different word than the word we saw for the 2008 crisis but I think it reflects the reality of markets now low rates are here to say having said that race if they go up well talks badly we're dependent why they go up and let me explain rates get thought because the economy is doing much more strongly than expected that's one who's if that's the reason rates go up it's a mix of that because rates going up makes dots you know they're less attractive but of a stronger economy have to your earnings and cash flows as well the net effect would very well be positive so you could see rates pot and stock prices God if rates go up because inflation goes up that's a much more negative scenario so I think when you think about rates going up you gotta stop and ask question why do why are rates going up because the reason might drive how you think about stocks no professor this is a big question which is that globally and also in India there is a big migration towards some mega camps and the reason by professor that is happening is because in US technology companies are growing in India large corporates are growing so do you think this migration towards the maker cap which started towards the middle of last decade is here to stay for another eight ten years in some sectors that's going to happen simply because of the nature of technology when it a core businesses are becoming more the rule than the exception you know advertising a Facebook and Google and are really winning they're winning it bigger and bigger rates every year because if you want advertise you want to go where the people are and guess what where they are they're on Facebook and Google so I think as long as that phenomenon kicks in and I sector you're going to see big companies get bigger and I don't think it applies across all sectors it's not like big steam companies are getting bigger it's the phenomenon that you see play out in some businesses because it's becoming more of winner-take-all kind of business and that's becoming more common and maybe we need to stop and ask a question about antitrust laws and how they're written because antitrust laws as they were written were designed to protect the consumer unfortunately when you think about using them against the googles and the Facebook's of the world these guys are not charging do i oppress they're charging too low price no consumer is complaining about facebook saying hey they're charging me nothing for my for being on social media that's wrong so it's a very different world we live in and I'm not sure the antitrust laws that were written a hundred years ago for manufacturing companies and even be applied against the businesses of today right let's talk about the important event the professor u.s. presidential elections in the second half of 2020 the current Republican administration has changed the narrative of the world because of trade war what should one expect from u.s. presidential elections I'm not talking about I'm not you know telling you to predict the winner here but what do you think will be the economic importance of this year's US presidential election I know I think it depends on whether you think because what's happened in the US I think is technology companies are hated by both sides of the spectrum it's not like dated by the Republican aid but the Democrats both sides of spectrum have problems with technology companies I think they're all wrestling with how do we deal with the fact that these companies are becoming so big and so powerful so I think no matter who wins the 2020 elections I think change is on its way for technology companies and I think if you're Facebook or Google or Amazon you need to learn to deal with that change because technology companies historically in the u.s. have not been very good at playing the political game they haven't lobbied like you know banks and oil companies they need to start to get more active in protecting their interests because their interests are going to be under solved no matter who it is the election professor millions of your callers they follow a blog very closely and you've been timing again indicating sharing your thoughts on how one should really value or assess valuations for Internet companies internet companies or tech companies for the decade gone by selectively have emerged as multi backers in this decade what is the right methodology to value internet companies because given that lyft and uber listings have not really created phenomenal wealth V work has been a disaster I wonder what is in store for the tech stroke internet companies first I'd like to see the band for the last decade young startups and tech companies have been priced rather than very then for those of you might not know that divergence pricing you look at what other people are paying for similar companies based on users and subscribers or revenues and you attach a pricing I would like to see more valuation questions asked about business - don't just tell me you millions of users tell me you know severe oil I'm impressed that you have you know thousands and thousands of hotels and you've got tens of millions of people who stay at them but I'd like to know what your business model is to make money that was the missing ingredient in this last decade I hope to see good sense prevail more in the coming decade but I'm not hopeful professor this could be a coincidence but we've seen that each decade new methodology emerges there are traditional parameters there are new parameters on which how markets their value and assess companies so which sector plan or methodology of valuation will be rewarded in the coming decade in the current decade and to your mind which would be some of the high-growth companies for this decade I think markets will reward you for taking the right risks if you take risk indiscriminately you're going to be destroyed in this market you have to kind of figure out which restore thinking because we take no risk you're going to make no return of this world so those people is our complete safety you're going to be making 2% 3% returns you're going to complain about it but there's nothing you can do about it you have to take risk but you have to take it in a sensible way if you don't feel comfortable picking the right companies my suggestion is by index fund spread your bets diversify because that's a much safer strategy then going are chasing stocks that did well last year or the year before because that's not a strategy that's going to make you money in this market so professor again for the decade gone by we've seen emergence of ETFs ETFs as a category now have a very large role to play in the way how investors would be allocating capital most of the active fund managers have managed to underperform underperform the benchmark indices do you think active investing is going to be dead and passive investing which has made a comeback is here to stay absolutely and the reason is it was longer but you have to investing for the most part is lazy and inefficient it's always been lazy and inefficient most portfolio managers were charging one and a half to two percent of their money to manage it but I hope he stops blindly in hoping that they would go up and guess what I can create an ETF of love peace talks and charge you nothing I think active investing is getting exactly what it deserves I will shed no tears for active portfolio managers who get wiped out by ETFs and index funds because many of them deserve to be wiped out I think active investing would stay but it'll be much smaller more focused and we consider consist of petroleum until actually brings something to the table so we're an actor money manager bring something to the table don't screen for stocks and tell me you're an act of money manager because an ETF can do that a lot more efficiently than you can and a lot lower cost professor a concern with some of the classic investors are raising in India as that India has got great companies but valuations and P multiples are ridiculous good companies in India on an average are trading at P multiples which are above 40 times and the line growth is strong and viable if I look at global companies because Indian good companies are still growing at 10 to 15 percent so who will get it right who will get it wrong do you think the purists who say that watch these stocks these stocks will not give good returns because of elevated levels or the new a Chennai crowd which believes in buying these good companies irrespective of the valuation well this is what I mean that's your definition of investing is to pick a company with a big name and pay IPE and hope and pray that the momentum will carry you forward why am i paying you money to be an act of money manager I think that's a very lazy way of investing I think momentum is a strong force you can write it you can make money until it stops I do think though that increasingly around the world what I've been noticing is a disconnect between stocks and domestic economies and the business as we globalize what we're discovering his company's success is driven not so much about what the domestic economy is doing but both the global economy is doing even the u.s. the link between US stock prices in the US economy has dropped off dramatically in the last 30 years so I think we can have two discussions one is about we're about where the Indian economy is going and the other about where Indian markets are going and actually come to very different conclusions on those two debates because the two are starting to dealing and it's not just Indians happening across the world let me ask you a difficult one now professor in India the headlines at least the economic headlines are not great the macro is deuterated benchmark indices are at an all-time high this kind of and so-called divergence between headlines and price action is unlikely to continue so where do you think the convergence will happen will the economy improve or will markets come down increasingly global you can get a disconnect between your earnings no this is what the economy's doing look at the last 10 units the US for the most of those 10 years the US economy was not growing very fast but US companies were growing earnings at double digit lows why because we were finding growth elsewhere in the world so I think that that's one of the factors causing it D linking it is absolutely true that the Indian economy stays in the doldrums the next five years and Indian companies are going to be in serious trouble I mean hopefully this too shall pass so markets you look long-term so often we're in the midst of an economic slowdown markets are seeing when the slowdown is going to end so maybe the markets are a little more optimistic about the future of the economy than economists are and guess what if you have to pick between what economists forecast of the economy and what markets forecast for the economy I think markets every single day professor some would also argue then India the corporate governance standards have been compromised and corporate governance standards have been compromised by some of the holier-than-thou corporate management so I'm not getting into specifics here but in general do you suddenly worry about corporate governance standards in India which up until now were very high and were in India was getting a premium because of that you know what corporate governance is worth as interesting phenomena where people think that you pass strong corporate governance loss you get good corporate governance I liken it to democracies that's it tomorrow you passed a law that said only good governments will be allowed in a democracy passes the law is easy enforcing the law is impossible because it depends on the borders you have in the democracy if you bought for good government you get them if you want for bad governments you get them same things provide corporate governance we want good corporate governance laws are not going to get us that you know what's gonna get us that you and I as stockholders have to stand up for our rights you and I have stock borders if say look I am not willing to be a second-class citizen in a company where i supply capital to you as an investor and you then ask me to go away because you're going to run the company as a family group running the company if we put our money behind our words good corporate governance is going to be part of the process but it's gonna take a long time bhindi is still full of even even companies that claim to be not family group companies companies that are run by founders and promoters who want to use markets to raise capital but they're not interested in getting any feedback from markets but how to run their companies that'll take a long time to change professor you've gone on record and have said that Indian technology companies are like all US manufacturing companies they are mature businesses and I think it's visible big tech in India is struggling to grow even a 10 percent so what does feature in store for some of these companies which are potential now for regarded great for their ability to generate cash I think you starting to see them try to recreate themselves but it's very difficult for companies that used to make money in one way make money in a very different I think that they're gonna try wanted to have them might make it and die or name names but they're all trying to kind of restructure themselves but this is a very different business even in the US the software business is slowing down so when you think about technology companies in the u.s. that are succeeding they tend to be companies as you described them as user base companies or plan the platform companies that's a very different mindset and you're starting to see some young Indian startups go down that space so who knows ten years from now your big Indian tech companies might not be the Infosys Azure the TCS is it might be that one of these new companies that's come out of pretty much know it because I remember 10 years ago Facebook was nowhere today it's one of the largest companies in the world so these companies can come out of nor I describe young tech tech companies in general is living in dog years they they grow fast they don't stay at the top very long then they decline fast and it's a nature of tech companies so you never know what's on the horizon and it is full of very bright tech people solid put it I would be surprised in fact I would be surprised if you didn't see some new names as tech names ten years from now that we don't even know about now professor I may sound sound slightly repetitive with this one but you know just just pardon me on that what would you say would be the high-growth sector for India and high-growth sector for global economy for this decade because every decade will give you something which markets are not anticipating it's only middle of the decade we realize that all this turned out to be the high-growth the sector so what do you think is going to be a genie in the bottle so to speak I think green energy comes to mind because in a sense we all accept around the world no matter what do you think about global warming the day of fossil fuel economies is coming to a close slowly but it's coming to a close but we still need energy we know all these appliances are not run on energy so green energies has to mature you can't so that's for the rest of your life so you're gonna see green energy as a space expect I think you're also going to see more you know on-demand services the know things that we used to go to a store to or to a more to do no I'm not even done online three days but on-demand services that you need as a consumers start to be delivered to you because we now have the technology to do it increasingly you're going to see things that in physical spaces move online for better or worse so you're gonna see businesses in almost every sector kind of try to disrupt the way things are done and I don't think these businesses are going to be the existing companies they're going to be new companies electric cars as part of the green energy space you're going to see it I think expand as a business mature as a business I don't know who the winners will be I own stock at Tesla now but at six months ago I don't know what the Tesla will be one of the great witness but this is going to be a space where you're going to see a fight play out and if you're an Indian automobile company you better be active in the space you're going to be left behind very quickly because disruption is coming to the space as well so professor given you a view on technology and the way how the dynamics of the world is going to move which corporate group of which corporate groups in India could be the outside gainers will it be the Tatas will it be the reliance or do you think something need disruptive is going to emerge from the from India Inc in this in the 20s you know what it's a crash I think this is going to be a place where every corporate group it's not going to be a question of skill it's going to be a question of luck that's going to determine who the winners and losers are I know that's not what we're supposed there was supposed to have skill and savvy management but sometimes being in the right place at the right time is is vastly underestimated so I'm gonna hold my farm I think I am happy with how the target group is kind of involved since their corporate governance struggles the question is can they be aggressive enough in the space because this is a space that requires that you do think you don't see the results right away reliance with Geno's clearly made that leap into the into a space where I think it's it's it's it's not doing it because one cell cell telecom service it wants a platform to set up the stuff they've set up for that let's see if it actually works out so I you know I would keep my eyes on how much a family group is willing to experiment in these phases and be willing to lose money because I think that's what's historically how the back is that they need to make money to show that something pays off and you have to be willing to kind of lose money for a long period I say oh you do I said no more you almost have to martyr yourself on Amazon debt which is you add to your patient you lose money but eventually you went out and family groups at the capital to survive these fights so they have an advantage edition pretty good years so professor now that you mentioned that clean energy and clean energy would be the big theme for the twenties how exactly do think markets are likely to value and very value some of the old economy businesses steel thermal coal companies you still the world would still need steel cement and thermal energy if the world is migrating towards environmental conscious companies I wonder what does feature in store for some of these businesses I think that you know Steel's been another long term I mean I met the president one of the things about cement is you gotta be local it's so expensive transported so what are they in bed it is historically being a cement companies it's you don't have to worry about global competition because it's not like you can bring cement across thousands of months but a very dependent on construction on the construction business locally to survive I think the worry that here are cement companies that technology will come up with an alternative to traditional cement not happened yet but it'll happen but steel has been in a long-term downturn and I think with wits to you I would point to the culprit that I appoint over the time just China and the reason I think of it as a culprit is for a decade from 2001 through 2014 China's huge all of these markets right good the construction the infrastructure the immense amounts that that China's was was using of these resources you can think about oil and steel and pretty much every construction material pushed up the prices of these commodities to levels way above what they used to be pre 2001 I think what's happened in the last five or six years is a return to normality because once you took that tremendous dependent demand from China out of the equation it kind of pushed the demand back to what used to be more conventional demand so some of this is markets try to adjust to the fact that there is no China coming back there is no additional infrastructure boost you're going to get in the next ten years so I think that they might be undervalued but they might be one of those I mean when the investment lease talks you have to invest for the cash flows you can't expect the price to kind of pop back up because there's a narrow pessimism about the future there might keep prices now we can still collect the cash flows well professor really appreciate your time thank you for patiently answering all our questions we've covered a range of topics from your of your view and valuations to where some of the steel cementing even technology companies are headed wish you a wonderful year I'd and once again a big thank you for accommodating this interview request

Channel: ET NOW

Views: 24,625

Keywords: steel sector, steel industry, steel industry india, indian steel industry, Business news, news today, economy, economic news, money, finance, financial news, times now, et now, latest news, stocks and shares, stocks today, Investment, shares, stocks, exclusive interview, aswath damodaran, aswath damodaran et now

Id: OQkZcO_J3aQ

Length: 26min 44sec (1604 seconds)

Published: Wed Jan 15 2020