‘Equity plans to give better returns than fixed income’

After falling 4 per cent in 2015, the Nifty 50 has dropped a further 2 per cent in just three trading sessions of 2016. However, Nilesh Shah, Managing Director, Kotak Mutual Fund, sees equities giving lower double-digit return or mid-teen returns for equities in 2016. This will be driven by revival in corporate performance and economic reforms gathering pace, he adds. In an interview to BusinessLine , Shah said going forward his fund’s strategy will be stock specific. Excerpts:

How do you see corporate performance, going ahead?

The low base of H2FY15 will help companies report decent earnings growth.

But there is not going to be a great revival in the second half of FY16 and for the full fiscal we will end up with 6 per cent earnings growth. FY17 will be slightly better and there will be gradual recovery.

What is your view on the markets and valuation after the recent correction?

We believe market valuation at 15.5 times one-year forward earnings is fair after the recent correction.

We expect lower double-digit returns or mid-teen returns for equities in 2016. Going ahead, market performance will be driven by revival in corporate earnings and pace of reforms.

Is your investment strategy biased towards large-caps since they have underperformed mid-caps?

In the large-cap space, there are many commodity players, public sector banks and exporters whose profitability suffered and so have their stock prices. Valuation is in their favour.

On the other hand, many mid-cap companies are linked to local markets, such as housing, white goods and construction. They have delivered better returns as they have done well.

Our strategy, going ahead, will be stock specific. Our job is to pick companies — whatever capitalisation or sector they belong to — that we believe will grow at a better pace than what is priced by the market. I believe multi-cap funds will be a better choice and investors should have a three- to five-year view.

Do you think equity as an asset class will continue to underperform debt in 2016?

The Indian equity market is already down 15 per cent from the top.

There has been a price correction and time correction. Invariably, we have seen that if in the previous year there is a negative return, the next year turns out to be better.

In 2016 equity mutual fund schemes — whether it be small-, mid-, large- or multi-cap — will give better returns than fixed income schemes.

Also, on the fixed income side, we see little headroom for rate cuts.

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