Markets

‘There’s money to be made in equity better than in other assets’

Priya Kansara Mumbai | Updated on January 17, 2018

02_Nilesh Shah

Priya Kansara

Despite corporate performance in the June quarter not as robust as in the previous quarter, Indian equity markets have not corrected much. Nilesh Shah, Managing Director, Kotak Mutual Fund, believes that Indian equity markets are currently supported by flows, sentiments and fundamentals. According to him prices have run up a little ahead of fundamentals, including of some mid-caps.

What do you think is driving the markets currently?

Markets are generally driven by flows, sentiments and fundamentals. From flows point of view, demand for equity from domestic investors at ₹1.75 lakh crore is far more than supply for equity at ₹1.2 lakh crore today. In addition to this, foreign institutional investors are buyers and they have bought virtually every single day post-Budget.

Sentiments are bullish as there is hope for better growth due to adoption of fiscal prudence and improvement in domestic liquidity conditions.

Fundamentally, there are expectations that earnings will recover due to record high foreign direct investment, higher government spending, certain initiatives taken by the government, low oil prices, transmission of lower interest rates and reasonably good/well-spread monsoons. One must also place this upmove in the global perspective, as many global markets have also moved up over the last few months.

Do you think Indian equity markets have rallied ahead of fundamentals?

Prices have run up a little ahead of fundamentals. One has to extend the time horizon or follow the asset allocation model to make money out of this market. If you have a relatively longer view and pick up the right stocks there is money to be made in the equity market better than in other asset classes.

The June 2016 quarter has not been as good as expected. Your views.

Broadly, there have been some earnings downgrades, especially in export-oriented businesses, while many domestic-focused companies have maintained their earnings momentum.

Cement, automobiles, auto components, rural NBFCs, agrochemicals and specialty chemicals have delivered above expectation results. Disappointment has mainly come in select pharmaceuticals, information technology and fast-moving consumer goods companies.

Do you think there is money to be made in mid- and small-caps?

Most mid-caps are more domestic-focused and hence, have been able to deliver better performance than large-caps. Certain mid-cap stocks are quoting at high valuations compared to larger ones. In the initial stages of economic recovery, mid-cap companies tend to disproportionately benefit from improvement in capacity utilisation. Also, mid-caps generally have a higher cost of capital and, therefore, say 100 bps fall in interest rates is likely to have a higher impact on mid-caps’ financials compared to larger companies. Our call right now is to be stock specific.

How much rate cuts do you expect in FY17? Are you in the camp that says higher interest rates have hampered India’s economic growth?

We don’t expect a rate cut in August policy. But we expect 25 bps from here till December and one more 25 bps from January to March. We are still growing at 7-7.5 per cent. So, I am not buying that argument that our economic recovery is fragile and we need to give steroids of high liquidity and low interest rates.

How do you think MFs can tap the opportunity of growing number of high networth individuals?

We are a nation of great savers but we are not a nation of great investors. India has imported $220 billion worth of gold and precious stones in the last 10 years but total portfolio flows into debt and equity together has been only $180 billion.

What is your call on GST vis-a-vis its passage and non-passage?

Undoubtedly market has priced in passage of GST and its benefits over the long term. But market has not priced in the chaos which could come in terms of implementation of GST in the short term. If GST does not happen that will be a disappointment for the market.



Published on August 02, 2016

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