According to Shah, the market is now trading at the lower end of the fair value and investors should stay invested.
At a time when wholesale inflation is negative and retail inflation is 5 percent, a real return of 5 percent is still very good, he says.
According to Shah, the market is now trading at the lower end of the fair value and investors should stay invested. He says the gloomy mood in the market right now is similar to that seen in October 2008 when the Sensex had fallen to 8000 and many felt the index could further slide to 6000.
However, the Sensex rallied to 12,000 over the next six months. Shah says it is tough to call a market bottom. Valuations are cheap right now and while a big rally looks unlikely, there is more upside than downside from current levels, he says.
He sees the market reacting to Budget announcements and feels there is no reason to be pessimistic about the Budget. He says the market needs a pro-growth Budget which could lay the foundation for a sustained rally.
Below is the verbatim transcript of Nilesh Shah’s interview with Latha Venkatesh, Anuj Singhal and Sonia Shenoy on CNBC-TV18.
Latha: You have seen this before, does it seem like 2008, does it seem like September we thought that we have lost 500 points, 1000 points very easily but then March of 2009 was to give us much more in terms of blues. Does it get that bad?
A: I think people will learn from their experience of October 2008. Yes indeed market corrected to 8,000 levels and even at 8,000 there were no dearth of people saying that it will surely go to 6,000. However, pretty soon it climbed back to 12,000 which was a 50 percent jump from the bottom of 8,000.
My guess is that, that experience will be still live in the memories of people. One never knows where the correction will end but hopefully remembering October 2008 we will not become as cheaper, as attractive in 2015 as we were in 2008.
Anuj: The big problem this year has been, it has been so bad for retail investors in terms of their portfolio values. Just looking at some mutual fund data, there is nothing which is giving any positive return and most of the good quality stocks this year have fallen 30-40 percent which was not the case last year. So, what is your advice to the retail at this point in time?
A: On a five year basis, even in today’s market, most equity mutual funds would have delivered 10 percent plus return and that is tax free. Now, it is not a good return to get in, in equity scheme but if inflation is running negative in a wholesale price basis and consumer price index (CPI) is 5 percent, then 5 percent real return is not that bad.
As Governor explained, we have to look at the real return and not the nominal return. My recommendation to equity investors will be that yes, last two years have been brutal, we were all expecting market to do well. It has not done well but it has become now cheap. It has now become lower end of fair value. If you stay invested, there might be triggers going ahead which can support the market. Not that we will see an excessive rally in the market but certainly from this point of time, there is more upside and less downside.
Sonia: My only fear is that we could be perhaps headed for a post Budget sell-off as well because if the Budget raises taxes or perhaps borrowings in order to fund the expenses, the market could maybe react adversely. Is that your fear as well that a post Budget sell-off is in the offing?
A: Absolutely. The market will react to what choices we make in the Budget. If the choice we make in the Budget is related to let us say increased taxes, increased borrowing program, do away with capital gains tax on the stock market and so on and so forth, then surely market reaction will be negative.
However, on the other hand, if the Budget takes into account the current status of economy and decides that it will monetise governments assets – like they have holding in SUTTI which holds three bluechip companies, like they have so many lands and buildings which they can monetise.
If the government makes a dream Budget like we had seen in 1997 then can the market take off? My feeling is that yes the market can take off. I don’t see a reason why we should assume that the Budget will be negative for economy. It might as well be the trigger for being positive to the economy.
Sonia: What is the expectation as far as recovery in the market is concerned because many people believe that perhaps this could be around the bottom for the market but what if we take about one, two or maybe even more than two years for prices to recover to the levels that we saw in 2014?
A: One, we require some amount of sanity in the global risk-off trade. Today, the market capitalisation of a country like Brazil, Russia, they are lower than one large company in America. Can one company of America be bigger in terms of value then the whole country of Russia and Brazil which owns natural resources, which owns between 12 percent and 17 percent of worlds land mass? My feeling is that at some point of time rationality will prevail, sanity will come back. So, we require a positive situation from the global sell-off side.
The second thing which we require is definitely in our own country and we need a Budget which is supportive for growth. We need parliament which is actually enacting legislations related to land reforms, labour reforms, goods and services tax (GST), bankruptcy code. We need monsoon which for last two years has been below average but hopefully this year should be normal. Finally we require corporate earnings recovery aided by lower interest rates and higher liquidity and ease of doing business. I think if you put these five ingredients together, there is no reason why our market will not continue to march like it has been marching upwards for last 30 years.
Latha: What was the percentage inflows in January in your funds compared to what it was in December? How much lower?
A: We at Kotak Mutual Fund have outperformed the industry but our size is small. So, it is not going to make a material difference.
Latha: Not performance, I am not looking at your NAV performance at all. I am asking you inflows?
A: I am talking in terms of flows only. The industry has fallen by about 50 percent in January over December. If I see last 15 months average, before December 2015, it was about Rs 6,700 crore a month. In the month of January the total inflows have been around Rs 2,600 crore. So, compared to the 15 months moving average, there is almost 50 percent drop. At Kotak mutual fund our drop is far smaller but my size is too small.
The point is that, as Anuj mentioned earlier, in last two years we have collected more money than what we have collected in previous 10 years. In this two years inflow, the experience has not been very satisfactory to say the least. Now, we need to engage with our investors. There are distributors who are even calling today, I have collected application should I put in today and we are saying that please don’t put lump sum investment, please try to do SIP.
I also want to talk about three things which I believe will be surprising market on the positive side. One is the monsoon. Number one, we never had a hat-trick of failed monsoon. La Niña which is occurring right now in Pacific Ocean should be supportive of a good monsoon. So, there is a reasonable good chance that this year’s monsoon will be better than previous two years.
Second, we believe there is fair amount of work going on bankruptcy code and in this Budget session there is a reasonably good chance for bankruptcy code to get cleared. Market is pricing in that there will be no work done in the parliament. If some of this law gets passed, there is a positive surprise over there.
The third thing is related to earnings recovery in corporate India. Clearly today earnings are getting depressed because banks are clearing the backlogs of NPAs but those NPAs are not accumulated in this quarter. They have been accumulated over many quarters and the cleaning up process is beginning which means the future profitability growth will be far higher than what the current numbers are suggesting. So, when people are talking about aggregate earnings, they need to discount the fact that the NPA provisioning by PSU banks is resulting into suppressed profitability. Hopefully with adequate liquidity and interest rate cut and ease of doing business, we could see gradual recovery in the corporate earnings as well.
So, these are the triggers which could be positive. The big thing is obviously the Budget from a sentiment point of view. Today valuations have become at the lower end of fair value but the sentiment is badly impacted partly because of what has happened in month of January and February and partly because what is happening in the global market. So, we need a sentiment trigger boost which the Budget should provide. As Sonia mentioned, if it is by way of increased taxes, increased borrowing, tinkering with capital gains tax and dividend taxation, then surely it will be negative trigger to the sentiment. However, it could be positive in terms of monetisation of assets to fund the resources.
(Copy edited by Santosh Nair, interview transcribed by Priyanka Deshpande)