Speaking to CNBC-TV18 Nilesh Shah, Managing Director at Kotak Mahindra Asset Management, said that it is better to wait for results from the demonetistiaon move.
He spoke about domestic institutional investors buying. He said that whenever markets have corrected below 8050, there is lumpsum investment. This is cash we are receiving on a daily basis and deploying into the markets, he said.
He is cautious on real estate sector as it has been witnessing a slowdown. Gold and jewellery is also one sector which is seeing a downturn.
He expects magic from the Budget. He would like the government to cut tax rates, spend more infrastructure and honour its fiscal deficit commitment.
He would like the policies to be more pro-reform than populist as it would determine the PE of the broader market.
He is not negative on FY18 earnings.
Below is the verbatim transcript of Nilesh Shah's interview to Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Sonia: Is the mood still sombre with respect to demonetisation because last time when we spoke to you, you were a bit cautious? Do you think that things could get worse in the first part of the year?
A: The appropriate word will be sombre because lot of things, which are happening on ground, we are able to collect data on an anecdotal basis. So one side, we have seen that the rabi season crop planting is up 6 percent on an average. Then there is a feedback that these are not remote sensing satellite estimates, these are eye-catcher estimates and there could be some data discrepancies over here. We don’t know where the truth is. The gut suggests that if your reservoir water levels are above 10 year average hopefully rabi season should be good from a water point of view, from a moisture point of view but if cash shortages have created trouble in terms of buying of seeds and fertiliser, that could be worry.
So the market and we remain little bit circumspect. We want to see the data and then take a call and today lots of data is being thrown about, which is more anecdotal. It will be fair to wait for the results and also hear from companies how they are expecting their business to shape up in Q1 FY18.
Latha: Yesterday there was a very big domestic institutional investor (DII) number, you suspect it as NAV propping?
A: No. I don’t think so. Now we are in a market where we have to prop our NAVs at a quarter end. We are being evaluated on a daily basis. This DII buying is purely function of level of the market and the stock, which are available. We have been receiving fair amount of flows, there are almost 1.15 crore SIPs giving us Rs 3,800 crore every month and what we have seen is that whenever markets have corrected below 8,000 Nifty then there is a fair amount of investments to systematic transfer plan. So this is the cash which we are receiving on a daily basis which we are deploying in to market whenever opportunity arises, gone are the days where I was judged based on my quarterly performance and judged now on a daily basis.
Latha: From the anecdotal evidence you have so far, what are the sectors that you would be wary off in January?
A: Essentially the one big sector to worry will be related to real estate. Clearly, there is a slowdown happening over there in terms of fresh supply as well as construction. So every sector related to real estate could be cause of a concern. The second thing is related to gold and jewellery. Clearly, there also there is a drop contrary to claims that because of demonetisation gold prices will shoot up. Post demonetisation they are down about 10 percent. So gold jewellery and distribution is one another sector where one needs to be careful.
My guess is that, going forward, it is far more going to be how much of bad news has been priced into the stock price. At a price even some of the depressed sectors will be a buy and at a price, some of those well performing sectors also will be a sell. So going forward, it is going to be far more stock specific market. How much of news has been priced into that stock?
Sonia: Now that the demonetisation is over, the focus will now shift to what the government will do in order to stoke an economy which is low on cash. What are you expecting from the government this Budget?
A: Essentially I expect a magic from them. I expect them to cut tax rates so that consumption gets boosted, I expect them to spend money on infrastructure so that the slowdown in private capex can be compensated to a great extent and I also expect them to honour that fiscal deficit commitment which they delivered in last Budget at 3 percent of fiscal deficit for FY2018. So essentially I am expecting government to raise revenue through innovation.
We believe in demonetisation as per today's headline about Rs 4 lakh crore has been deposited which could be whether they have passed through the tax net or not is debatable. If you can go after that Rs 4 lakh crore worth of deposit and you can catch them under Pradhan Mantri Garib Kalyan Yojana or through some other mechanism, that is potentially tax collection of 200,000 crore, that is good enough to give tax concession, that is good enough to spend on infrastructure and that is still good enough to maintain your fiscal deficit commitment. So essentially I expect government to be innovative in terms of spending as well as raising revenue.
Latha: Do you think that sectors like sugar is what one should take interest in?
A: From a portfolio point of view, clearly sugar is a very small sector, very cyclical sector and a lot of political overturns over there. It hasn’t created wealth for investors over a period of time. So, if you are capable of trading, certainly this is one sector where you should trade but if you want to create long-term wealth, investing in sugar stocks have not created as much sweetness in the portfolio as sugar has created in other things.
Latha: This should be a rural distress relieving Budget, how does a stock investor play it?
A: Essentially we are looking at whether good economics is good politics or not. Clearly, post Budget there is Uttar Pradesh (UP) election and in two and a half years there will be general elections. Till now market has been confident that good economics will be good politics. So many steps taken by the government has been pro-economic reforms, pro-growth and they have taken bitter pill in order to set up good economic foundation.
In this Budget, we want same trend to continue. For example, sugar sector if there is a concession being given in order to make sugar sector competitive from a market point of view, market will be more than happy to accept it for sugar stocks as well as for broad market. But if concessions are being given in order to win UP elections then certainly sugar stocks will do well but overall market can come down. So essentially we want continuity of government's pro-economic, pro-growth, pro-reform policies in Budget rather than populist measures to win election. That is going to determine the valuation or the P/E of the broad market.
Sonia: What about the other big factor, earnings, many people are indicating that FY17 will be a washout, FY18 could also be a wash out because we don’t know how long the ramifications of demonetisations could last. What are you factoring in and when do you see the first signs of recovery come through?
A: We are not that negative on FY2018 partly because there was a momentum, which was building up in FY17. Good monsoon and Seventh Pay Commission did result into good festival seasons between Diwali and Dussehra. Demonetisation did create a short-term impact, now how short is short-term is something we have to figure out. In FY2018 there is a good opportunity for earnings to recover provided government presents a Budget, which is while fiscally committed to prudence is also spending and giving boost to consumption as well as infrastructure. RBI maintains liquidity in the banking system to spur economic growth. Third, they cut interest rates at least by 50 basis points (bps) to ensure that the consumption and leverage buying can revive. Combination of these three things on both monetary and fiscal side could see earnings recovering in FY2018.