Mumbai: Ramesh Damani, a well-known value investor, expects the Indian market to have a bright Samvat 2074, driven by liquidity. Damani, 60, has been an active investor in the Indian stock market since 1989. He believes consumption will be a dominant theme in the Indian stock market. In an interview, he warned that non-banking financial companies (NBFCs) and auto stocks look expensive right now. Edited excerpts:

It has been a great year for the market. How does the next Samvat year look from here?

It has been a great year, no doubt about it but occasionally people like me have become circumspect about the market because it seems like there is some frothiness in the market, geopolitical risks, sluggishness in the economy. What we are realizing is that, liquidity trumps valuation.

Also, this gush of liquidity that we have enjoyed has made all these other factors a bit extraneous. This is not a flash. Indian domestic investors are finally getting optimistic about equities and that will continue. With developed and emerging markets hitting new high, would mean that foreign money will come back to India. While we always have to be careful, for now it seems the market can look forward to a bright year in Samvat 2074.

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Earnings have been behind prices. I think what is going to happen after this quarter is that the base effect of demonetisation will kick in. The low base effect should help earnings out there, and there should be some recovery as Indian companies’ profitability is at 5-7 year low.

What is the biggest risk to the market?

My feeling is that the bigger fear for the market is geopolitical risks. We don’t have any control over such matters. Market is not paying enough attention to those. But then, if for example, if you heard one year ago, and did not bet on the market due to that, you would have been poorer today. So, we just have to ride the bull until we see some ominous sign that would force us to get into cash. So far, it’s all under control.

Isn’t it ironic that domestic investors are upbeat about the market at a time when economic growth is lagging behind?

There are two things that play out here. One thing is that of all the choices we have, equities are a good investment. If you don’t know which teams are playing basketball and you see one team with 5-footers and one team with 7-footers, you are going to bet for the latter.

It is the same thing with investing in India. If you look at the landscape for investments, equities are the asset class which give you tax-free return. One-year capital gains is zero. Also, it is a very liquid market, and dividends are tax free up to a reasonable amount of Rs10 lakh. So, equities are the 7-footer team in India.

Which sectors do you think have become really frothy as this moment?

NBFCs and autos. While NBFCs are still under penetrated, the valuations in the short-term look expensive.

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With autos, you worry about the threat of electric vehicles and autonomous vehicles coming up. While it is not an imminent threat, it is a threat you can quantify 5 or 7 years down the road .

What are your thoughts on the consumption space?

Consumption will be a dominant theme that will be expressed in the market.

I think what sets India apart from other emerging markets is the fact that we are 1.2 billion people, with a chunk slowly graduating to the middle class. It is the consumers that take the centre stage.

For the foreseeable future, Indian consumer will continue to be at the centre stage of the economy.

Few months back, I was blessed with a grandson and I was thinking what kind of portfolio I can build that I can leave it as a legacy for him. The first thing is there is a technological threat to many businesses. So, I want to look at businesses which are very human centric and immune to technological challenges. Among the themes we mentioned, entertainment or liquor, quick service restaurants are likely to do well.

What is your take on insurance sector, after a slew of listings recently?

I think these are great businesses to own. However again I would not bet on auto insurance business. I think life and health will do well. Insurance is also an underpenetrated business in India and under-owned too, and so in both ways it would do well.

There have been a flood of IPOs. Would that impact the secondary market?

It always has been the case. However, we are still in the middle phases, and we are not at absolute frothy levels seen in 2007-08. People are making gains on listing.

What do you make of the reforms process by the government?

GST and demonetisation are both measures that will help the economy in the long run, but to think it will happen seamlessly was a bit of wishful thinking. The measure that I think government should implement in next 2-3 years is I think privatization of PSUs (public sector undertakings). Second—land and labour reforms, and third to kick-start stalled projects.

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They are saying they will privatize Air India. There is a huge message. Privatization would send waves of foreign money to India and would absolutely liven up the market.