Demonetisation seems to have been factored in from a price correction perspective, says Nilesh Shah, Managing Director at Kotak Mahindra AMC. However, he quickly adds that from a time correction point of view the market still needs more good news.
Referring to some positive news articles today like Paytm transactions exceeding card transactions in the country, jump in collection of local municipality tax dues and recovery of dues by state electricity boards, Shah says more such positive indicators are needed to revive markets.
Adoption of a cashless economy as much as possible and an equitable distribution of taxation burden with rest of india following the salaried class in terms of tax payments is critical, he adds.
Shah believes despite all the latest developments, it is tough to put a timeline or predict market direction. For example, he says, supposing the US Federal Reserve does not raise interest rates in December, as is so widely expected, then there is every chance Indian market will bounce back. Similarly, if the Indian Finance Minister announces any glitches in achieving the fiscal prudence target due to demonetisation, although quite unlikely, in his Budget speech on February 1, then market could correct.
Below is the verbatim transcript of Nilesh Shah’s interview to Anuj Singhal and Sonia Shenoy on CNBC-TV18.
Anuj: Of course we have been talking about this offline as well on how this demonetisation maybe really great move in the long term but in the short term of course the markets are always worried about near term earnings impact. Do you get a sense that that is now factored in and the market is ready to move on or do you get a sense that maybe there could be some more selling which is left?
A: From a price correction point of view probably at this level demonetisation has been factored in. However from a time correction point of view obviously we will have to listen to or hear more good news. Like today there are three news article which has talked about one, Paytm transaction exceeding debit and credit transactions in the country that is a positive move. Like the local municipality taxes collecting more than Rs 13,000 crore in dues, that is very positive because they will be able to spend money on infrastructure. Third is that the state electricity boards have recovered dues. So, we need some amount of this kind of positivity and adoption coming in the economy to be one, a cashless economy or as much as possible cashless economy, it is not full cashless economy and second, an equitable distribution of taxation burden where rest of India follows salaried class in payment of taxes. If we can adopt these two things then my feeling is that at this level demonetisation is more than factored in.
Sonia: It is interesting you made that point about time correction for the market. We were speaking about Samir Arora earlier in the morning and he said that it would take at least 6-9 months for the market to return to that pre-demonetisation levels. Is that a view that you concur with?
A: It all depends upon event. For example it is quite unlikely, but let us say in December 2016 Fed does not raise interest rate then will our markets bounce back, quite likely. On the other hand let us say on February 1 again is quite unlikely but let us say the Finance Minister does not honour the path of prudence which he had promised in FY 2017 because of the slowdown which is going to be caused by demonetisation. If that happens then market can correct. So, it will be function of events. We do expect the Fed to raise rates, we do expect Finance Minister to honour fiscal prudence which is why it is difficult to predict what will happen in 6-9 months. As I mentioned earlier if people adopt to cashless economy and people start paying taxes then we could see recovery much faster than what people are expecting.
Anuj: You spoke about Fed and that is also another important piece in the puzzle. If you look at the emerging market (EM) index in dollar terms. That is also down quite a bit ever since the Trump win and you have seen this big dollar strength of so much Foreign Institutional Investors (FII) outflows, do you think that could put some more pressure on the market?
A: As you correctly mentioned it is the FII selling along with demonetisation which pulled market down. If there was not FII selling led by rising US yields and stronger dollar probably impact would have been much lower. Now in December 2016 market believes that Fed will hike rates by 25 bps. So, to that extent it is very well known and very well discounted by all markets. The worry is what kind of guidance Fed will give. I December 2015 after raising interest rates they gave a guidance that we will hike interest rates four times in 2016. That was not discounted the markets and it spooked not only their market but also our market and they fell in January and February 2016. I hope with the new presidential election and the experience of 2015 December hopefully Fed\\'s guidance will be more like we will look at the data and then take a call rather than an aggressive guidance that we are going to raise interest rates four times. The market hasn\\'t discounted aggressive guidance from Fed. Of course they have discounted Fed\\'s ability to raise interest rates if economy responds.
Sonia: What do you do with individual stocks; are you guys pumping in some money now because I remember you telling me that for good quality companies it is best to put in money when the times are tough and when the sector is going through a challenge. So, would this be a good time to put in money into say Asian Paints which has fallen 25 percent from the top?
A: My feeling is that as a fund manager we don’t have the luxury of sitting on cash. We can at best recommend customers their asset allocation in terms of how much to put in equity and how much to put in debt. Certainly at 26,000 level, the Sensex is far better to invest than at 29,000 level of Sensex. In today’s environment where there is significant amount of correction in certain midcaps as well as some largecaps, it is opportune time to relook at your assumption and then invest.
In our opinion, we are seeing a very big trend emerging which is of unorganised sector to organised sector. Couple of distributors who accept credit cards, are gaining market share from those shopkeepers who only transact in cash. Same analogy will get extended into other side of economy where unorganised sector which are thriving on cash collection, which are thriving on tax arbitrage in host of sectors, will yield market share to organised sectors which will be more tax compliant, which will have better supply chain management and which will be able to transact on credit or in non-cash items rather than only through cash. So, we are looking at that sectoral gain for organised sector where we could see faster growth and probably higher margin.