In an interview with the Economic Times, NYU Stern Business School finance professor Aswath Damodaran shared his views on the current market environment and plight of active management.
Here are highlights of his comments:
- While the last decade has been a remarkable one for U.S. equities, Damodaran points out that compared to the last 8 decades, it “falls right in the middle” and in fact was the fourth best performing decade among the last nine.
- He said he would not expect stocks to sustain the same level of performance in the coming year because ‘that’s just not how the markets work.”
- With regard to what a rise in rates would do to valuations, Damodaran said that after 8 years of low rates, perhaps we have to accept that this is not an aberration, that we “live in a world of low rates and high risk premiums.” If rates do go up, he said, the effect on equities will depend on the reason for the rate increase. If the rate increase is due to economic growth, then higher rates could co-exist with stock gains. If, on the other hand, rates rise due to an increase in inflation, he said “that would be a more negative scenario.”
- On the migration toward mega-caps in this country, Damodaran noted that there seems to be a “winner-take-all” mentality that might suggest that our antitrust laws “no longer apply to today’s businesses” and should be revisited.
- As we approach the next presidential election, he argued that change is on the way for tech companies which have not typically been adept at “playing political games.”
- For today’s tech businesses, the focus should shift from “pricing”—that is, what people are paying for the shares—to valuations based on those companies’ business models. This has been a “missing ingredient” over the past decade, he said, adding, “I would like to see more good sense come into play in the coming decade, but I’m not hopeful.”
- “Markets will reward you for taking the right risks,” according to Damodaran, who said that investors looking for complete safety won’t make returns. For investors looking for safety, he said, “buying index funds, spreading your bets and diversifying is a much safer strategy than chasing stocks that did well last year or the year before. That’s not a strategy that will make you money in this market.”
- Active investing, Damodaran asserts, “is getting exactly what it deserves.” He characterized the strategy as “lazy and inefficient” adding that it will survive but on a much smaller scale. Active managers, he argued, will have to “bring something to the table.”
- Damodoran points to an growing “disconnect” across the globe between equities and domestic economies.
- Green energy, he predicts, will be a high-growth sector in the coming decade.