Indian equity markets are offering a respite but the respite could be short-term, Nilesh Shah, MD of Kotak Mutual Fund says. Although the volatility in the markets is likely to remain for some time, he is working with an Indian growth projection of between 5 and 7 per cent.
In an interview with Shweta Punj from Moneycontrol, Shah explained that now is the time for India to deliver on earnings growth, push forward with labour reforms, focus on ease of doing business and convince investors to invest in India.
Edited excerpts
What are we really seeing in the markets today? Is this a temporary respite or do you see this continuing?
It's a very, very volatile market. It is a VUCA world ( volatility, uncertainty, complexity and ambiguity). In the short term, flows determine prices. In the long term, fundamentals determine prices. Right now, FPI selling (has) pushed the market down. FPI selling occurred for a variety of reasons. One was the vacuum cleaner started by President Trump in the US, which pulled capital away from other countries. There is the expectation of a tax rate cut in the US, which is attractive for equity investors. Also, the tariff walls make sense for American companies, but not for American consumers.
Put together, our valuations were reasonably elevated and the delivery didn't materialise with GDP growth coming down in September ‘24, as well as December ‘24, below expectations. Corporate earnings growth was also subdued. Together, fundamentals and flows resulted in a market correction. FPI selling has undoubtedly reduced, but they are still selling, barring one exception. I think the market is not kind enough to give an exit to anyone. If they are aggressively on the sell side, prices will be lower, buyers will buy at a lower price, not a higher price. And hence, I will say this is still a market driven by flows. As long as FPIs are selling aggressively, markets will continue to go down. As soon as their selling stops, the market will bottom out. And as their buying resumes, markets will start going up.
Do you expect this respite to continue? What are the markets reacting to? Because if we were to go by what the Fed has said, they have revised the US growth forecast downwards, and they've increased the inflation forecast. So, what is driving this optimism?
The Fed has cautioned the market of growth slowing down, inflation inching up as tariffs come into play. What the market is probably taking confidence (from) is that tariff-led inflation is temporary. And hence, there is a respite rally globally, as well as in India. It is still a VUCA market, President Trump's announcements can change direction, and the world is moving from globalisation to de-globalisation or protectionism. And there are events which will continue to make the market volatile.
So, you're expecting the volatility to continue going forward. And are we seeing this trend to continue for a year or longer? Is there a time frame that we can work with?
If we compare the Indian market, we have two options. One, we deliver on the earnings growth expectation of the market, then volatility will recede. Or we deliver even a little below expectation, but others start scoring self-goal. For example, today in emerging markets, effective investment choices left are between India and China to invest - Russia, Brazil, South Africa are more or less out. So, either we do very well, or we pray that others score a self-goal so whatever we have done looks very good. In these two scenarios, our volatility can come down. I think it's far better to focus on improving our earnings growth and convincing investors that India is a great market to invest in.
We saw some FII buying. Will they continue to be net sellers or do you see the tide turning? What is exciting the FIIs at this point? What changed yesterday? Was it the low inflation number that has come out that's giving them the optimism and the confidence to come back to India?
If we look at the data between October and December ‘24, four categories of FPIs were on the selling side. The long only FPIs, primarily driven by the US, the insurance and pension sector FPIs, and the passive FPIs. There has been redemption across emerging markets, so passive FPI redemption is understandable. Insurance pension and long only are probably a function of the US vacuum cleaner.
Two kinds of FPIs were buyers - sovereign wealth funds, probably from the Middle East and Norway and Scandinavian countries, and the university endowment funds, again, probably driven out of the US. So, not all FPIs were sellers, sovereign wealth funds and university endowment funds were on the buying side. And one day of buying doesn't change the trend. You need some more data to say that the trend is emerging.
We've been getting stories about how retail investors are feeling the pain, they're discontinuing SIPs and so on. If you could just help us understand the concept of a volatile market and what fundamental mistakes investors make in such markets?
Most investors are driven by past performance to invest. But there's no permanence. What goes up also comes down. Effectively, they buy something when it is going up and sell it when it is going down. The way to make money is to buy when things are going down and sell when things are going up. They do exactly the opposite and then blame the market. For investors, it is extremely important to know that markets are complex. And it's not something which they can master without reading, without spending time, without understanding.
You go to an advisor, you go to a distributor. He or she understands your risk profile, your investment goal, and then recommends a systematic plan to invest. Today we are seeing differentiation between investors who have been with a distributor/ advisor over a long period. They have tasted success. They have seen volatility over the years and survived that. They continue to do their SIP. In fact, for every correction, they are looking to add a lump sum or even top up SIP.
On the other hand, unassisted investors are coming for the first time into the market, investing based on the last six months’ performance. And they are panicking. When they see a negative return, they feel they have been cheated and they end up redeeming. A good part of this time is that most investors have lost far more money on direct investments in stocks compared to mutual funds. Almost all categories of mutual funds have outperformed the market on the way down, whereas most investors would have underperformed the market on the way down. So it is a good learning experience where people gain experience by incurring some losses.
What would be your advice for investors when they are losing money in mutual funds?
My question to them will be, if Virat Kohli is playing and he gets out, what do you do? Do you start believing that now he'll never be able to score a run and he is out, so he should be fired from the team? Answer is no. You still build a team with Virat Kohli because yes, every batsman will get out at some point of time. In the same way, you build a portfolio of (mutual) funds. Some will deliver negative returns when markets are going down. We are not an absolute return provider that guarantees you a positive return every time. We give you outperformance over the benchmark index. And if you believe India will grow, if you believe equity markets will reflect India's growth, then every correction is a great opportunity to buy.
So now is a good time to invest, to top up your SIP, maybe?
Whenever you have money, that's the best time to invest. Number two, you can follow your asset allocation profile. Now suppose you said I don't want to time the market, I don't have access to a distributor. Fair enough. You can invest in our products like the equity savings schemes if you are conservative, you can invest in the balance advantage fund if you are an average risk taker, you can invest in an asset allocation fund if you are an aggressive risk taker. You essentially shift allocation decisions to the fund manager. They will divide between debt, equity and precious metal to give you a whole solution.
So what are you betting on at the moment? What's the right mix between debt, equity and metal?
It will vary from you to me. Every individual is different. My goals could be different. My risk profile could be different. The challenge is that a conservative guy trying to mimic a risk taker will always end up in a disaster. And a risk taker trying to copy a conservative guy in a falling market will again be a disaster. So know yourself and then invest.
For a middle class salaried employee, what would be a low risk, investment portfolio?
If you're very conservative, I'll say take the equity saving scheme. It has about, on an average, a 30 percent allocation to equity. It ranges between 10 to 50 percent in terms of equity allocation, but the average would be about 30, 35 percent arbitrage and the balance 35 percent in debt. It's a combination of a hybrid fund, part debt, part equity.
Okay. How about gold, what's your outlook on that?
We have been bullish on gold for a while. Essentially, the call is on central banks continuing to buy gold. In China, even insurance companies have been allowed to invest in gold. And the gold mining producers do not have enough gold to supply. So there is a supply squeeze emerging. And buying continues to remain robust between central bankers, insurance companies, and obviously, Indian housewives. Put together, there's no price for guessing which way gold prices will go.
And what would your recommendation be for someone who is open to taking high risks at a time when valuations might be attractive or are low at this point? What would your advice be for those kinds of investors?
I'll advise them to bet on entrepreneurs. Today, across the listed as well as the unlisted space, you are getting some wonderful entrepreneurs. There's one entrepreneur in Gujarat which makes CNC machines capable of competing with China. There's someone who is making alloys, which is not India's specialty, which is supplied to the fifth generation power turbine manufacturers globally. There's someone making explosives, which can meet local as well as global standards. There's an entrepreneur in an unlisted space, who created a 15-minute charging battery. It pains me to see that when I put that news in the WhatsApp group, one or two people react. But in the same WhatsApp group, there were 100 people who forwarded how a Chinese company BYD delivered a five-minute charging solution.
An Indian company delivering a solution in 15 minutes, you are not even recognising it. And all of you are happily promoting BYD's, China's five-minute solution. Now, these are the entrepreneurs to bank on. They will create value. They will create wealth. Some of them will undoubtedly fail. So if you are a risk-taker, go out and back entrepreneurs in the listed as well as unlisted space.
In that context, China has built a narrative around innovations. I think DeepSeek really shook things up. When it comes to the India story, what is exciting you at this point? Or does India need to work on getting its narrative right to get the FIIs back again?
So, there are two proverbs. One which says shout and it will sell. And the second which says silence is golden. Both are quite contradictory. But both are true. Of course, silence is golden. And hence, India has to work. It has to deliver. It has to back its entrepreneur. But at the same time, shout to sell. That is also relevant. And we need to put out narratives. For example, everyone circulated DeepSeek. And they said it was made for six million dollars. Could there have been a bigger lie than that? There is explicit and implicit subsidy given by the Chinese government. Everyone knows that. But no one wants to talk about it. So that is the power of China's narrative. They have been able to build that narrative. Undoubtedly, they have done the work.
DeepSeek undoubtedly has shown a way to leverage AI through software rather than hardware. But there is also a narrative which is what we have to learn from China. I think China learned from Vishnugupta, Acharya Chanakya. Saam Daam Dand Bhed. We have forgotten about Chanakya. And hence, we have to work hard. But we also have to build a narrative.
So initially, we did get our narrative right. We were talking about reforms. We were talking about minimum government and so on. But in the last two years, one gets a sense that India might have given up the job of building narratives to other countries.
No, I wouldn't say that. One year's underperformance in the market does not change the narrative. And even 10 years before, if you read international newspapers, they were by and large portraying things negatively. The coverage of the Mahakumbh, for example, the focus was on finding faults. Ten years back, our work spoke. In future also, work will speak. But if we can combine it with a narrative, then there will be a great opportunity.
For example, newspaper reports say that tariffs will push India to open its market. Now, we have one of the largest trade deficits in the world after the US. If I have a large deficit, doesn't it mean that I have an open market? Second, show me one country where the largest telecom company, largest private sector insurance, largest private sector bank, largest FMCG company, and largest automobile companies are majority owned by foreigners. It's not there in the Western world. And yet they keep on accusing us of not having an open economy. In China, there is Google. There is no Yahoo. There is no Facebook. There is no X. And yet that organisation doesn't talk about China being a closed economy. They run a trade surplus of a trillion dollars. Straight surplus. No other country barring Germany and the US has exports of a trillion dollars. And yet they say China is an open economy. So, please get the data correct to make a narrative.
China again has emerged as a compelling investment story. What is working for India? What are the narratives that it can really build on? And also in terms of what would the investor community be looking out for from Prime Minister Modi.
We have to focus first internally, which is growth and governance. Today, our GDP growth is likely to be mid-single digit 5, 6, 7 percent. We are not making enough reforms to push it to double digit growth like China did for decades. Can we at least take it to a high single digit through some amount of reforms? We have done a lot on ease of doing business, but can it increase further? There are a lot of hidden savings in gold. Can we bring that out in the economy so that there is enough capital available for funding growth? There is some amount of spending on freebies, which is coming at the cost of infrastructure, while some subsidies are necessary. Can we create a balance so that infrastructure spending continues, which creates a better multiplier effect in the economy?
We also have to focus on governance. In China, we have seen the state prevailing over entrepreneurs. In India, we have to show to the world that entrepreneurs are supported, not suppressed like China. Growth and governance is in our hands. And finally, it is the narrative. Chinese markets have done very well in the last one year. But do you know that they are trading at where they were 17 years before? Not many people know this. Did you know that Chinese earnings growth in the last 10 years, the CSI 300 growth was roughly about 10 percent in renminbi terms. In the same time, the Nifty 50 EPS has grown 170 percent in 10 years. So we haven't told the world the exact narrative which we should be telling.
The economic survey spoke about deregulation. That is a theme that is dominating the minds of Indian policymakers. However, we are a federal country and a lot of reforms have to be driven through the states. What challenges do you see in making governance reforms? When you look at a five-year or 10-year horizon, what in the India story besides the entrepreneurship point that you've already mentioned, gives you optimism?
In India's case, whatever one says, the opposite is also true. So no matter whatever optimistic statement I make, there is always a pessimistic side to it. But in the market, the pessimist may sound intelligent, but the optimist makes money. And which is why as fund managers, we are bound to be more optimistic than pessimistic.
Number two, there are wasted interests, which are beneficiaries of the ecosystem as it is today. Those need to be broken. For example, technology and reforms have made the issue of passports quick and efficient. How did this change occur? If you look at India’s immigration system, compared to the US, it's far more efficient. Most of the time, the time to get out of immigration is less than a few minutes. The staff is friendly. And the whole experience has improved.
In both these cases, there was public private partnership. Some training happened, some process improvement happened and boom, we have one of the best experiences. What we did with passports, what we did in immigration, we have to do in every other aspect.
Of course, there we also have GST, we have IBC and so on. The big reforms the Modi government needs to push forward now in terms of streamlining IBC, or streamlining GST, what would your top three recommendations be?
The first recommendation will be to improve the ease of doing business. Today, our entrepreneur is burdened with lots of compliance. The government has removed many compliances, but there are still many more pending. We have to unburden our entrepreneur so that he can compete with the best in the world. The second reform which will be necessary is judicial reform. Capital flows in when there is confidence. We have seen capital going to countries where there is rule of law and capital living countries where there is absence of rule of law. We have an independent judiciary, but it is overburdened. And hence, the rule of law in terms of implementation is getting delayed. We must equip our judiciary with appropriate infrastructure so that the confidence and comfort of capital to invest in India increases.
The third and final thing is what is known as factor reforms. Buying of land, hiring and firing of labour. And finally, market or capital flows. Today, the market is kind of unlevelled in terms of capital formation. People put more money in currency notes than they put in mutual funds. People put money in gold, in the tijori (locker), and gold in the official system. This restricts capital flows to entrepreneurs. If I can do land reforms, labour reforms and market reforms, then hopefully there will be enough capital available for entrepreneurs. With ease of doing business and judicial reform, they will be more confident and unburdened. That will unleash double-digit growth for India.
Are you looking at Trump’s tariff threats as an opportunity for India to open up, to pull down our tariff and non-tariff barriers and to really make it a level playing field? And if tariffs are lowered, it will benefit Indian consumers. Or do you think that India needs to stay the course and protect its industries as it has done so far?
I don't think so. There is one simple solution over there. Today, China has large manufacturing competitive capacities. If we reduce tariffs significantly, they can flood our market. They'll bring deflation here as well as recession. We need to protect our local entrepreneurs. We need to support them. Now, tariff is a two-way sword. If we give a lot of protection, the industry becomes obese and they don't know how to compete. And if we don't give enough protection, then maybe they'll start running, but they will not complete the race. We have to do a judicious balancing on tariffs so that there is enough protection to our local industry. But at the same time, they continue to run and win the match.
Any specific industries that need the protection at this point? Or industries that should not have protection and be completely competitive?
Different industries have different needs and we'll have to analyse. For example, in India, ready-made garments haven’t taken off. Our exports are less than Bangladesh's exports. That drop is because our labour laws are inflexible. You can't keep one lakh people in the factory and then downsize it to 50,000 if you want. But that's how ready-made garment factories the world over operate. Second, there are concessions or quotas given to developing countries like Bangladesh, Vietnam. Now, Vietnam has much higher per capita GDP than India, but they still have a concessional quota. How do we get those kinds of quotas in our favour, whereby we can work with garment manufacturers worldwide?
And finally, today what we are seeing is that there is a vertical integration from fabric to garment. The buyer wants to deal with just one person. We haven't created that vertical integration in our industry. How do I unburden my entrepreneurs so that they can create vertical integration and become competitive to the world? It's a combination of lots of things coming together.
Very quickly, your advice for investors who have lost money in the stock markets in the last few months and your outlook for India's growth and outlook for India as an investment destination for the world?
India is one of the best investment destinations for the world because it provides growth as well as governance. Number two, if you have lost money in the stock market in the last six months, learn from those experiences. Don't make the (same) mistakes. If you bought kachara (trash) stocks and lost money, take the pledge that I will never buy kachara stock. Take a pledge that I will never ever follow tips without doing proper research. Learn from your mistakes.
And your outlook on India's growth, do you think it's going to be at about 6.3, 6.4 percent? What are the estimates that you're working with?
So, we believe our medium-term growth trajectory is likely to be in mid-single digit, 5, 6, 7 percent. Good monsoon, good global economy around 7 percent. Bad monsoon, bad global economy, higher oil prices - around 5 percent. We have the potential to take it to double digits if we improve ease of doing business, if we do judicial delivery, and if we do land, labour and market reforms.
Labour reforms have been pending for a very, very long time. So, now might be the time for Mr Modi to use his political power, or capital to power through these reforms.
Undoubtedly, the leadership has to be taken by the government. They have framed the rules. Only they have the right to modify the rules.
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