Based on today's scenario of low double-digit earnings growth, strong liquidity flow, the higher end of fair valuation and positive investor sentiment, it will be fair to summarise that the downside to the market is limited, Nilesh Shah, MD & CEO at Kotak Mahindra AMC, said in an interview to Moneycontrol.
According to Shah, who has more than 28 years of experience in capital markets and fund management, a correction, if any, in the market will be an opportunity to buy.
Although most experts globally see a Fed funds rate cut in September, he believes the Reserve Bank of India (RBI) is in a far more comfortable position than the US Federal Reserve, given that economic growth is good, inflation is within the RBI's target range and the rupee is stable. The central bank is unlikely to cut rates in CY24, he said. Edited excerpts from the interview:
Do you see a low probability of a deeper correction in the equity market in the coming quarters?
In the market, never say never. Events can happen and shock the market on the downside. Based on today's scenario of low double-digit earnings growth, strong liquidity flow, the higher end of fair valuation and positive investor sentiment, it will be fair to summarise that the downside to the market is limited and a correction, if any, will be an opportunity to buy.
Please remember that the market has irrational exuberance in low-floating stock counters in a few sectors. Valuation in those sectors is building in too much optimism. They believe the management of these companies is like Hanumanji, who had the power to jump across the sea in one jump or who would lift a mountain. We all know that Hanumanji was divine. Management is human.
Is it the time to have mid-cap and large-caps in the portfolio, and avoid small-caps?
In general, we have been recommending focusing on quality over momentum, high-floating stock / diversified ownership over low-floating stock / concentrated ownership, and reasonable valuation over expensive valuations. It is likely that large- and mid-caps will provide better opportunities than small-caps on these parameters.
Are the high valuations justified for the SME or small and medium enterprise space?
Growth and governance justify the valuation. Any SME that can deliver growth with governance deserves a higher valuation. Greed and the greater fool theory cannot justify the valuation, nor can liquidity and concentrated holdings justify the valuation.
Are you a buyer in the chemicals space now?
We have been in the chemical space for a long time. We have seen excellent returns on our portfolio up to the last 8-10 quarters. We booked profits from a prudence point of view as they were becoming a large part of the portfolio. With the benefit of hindsight, we should have sold more. We didn't anticipate that the WTO (World Trade Organisation) would be ineffective against Chinese dumping and growth-hungry China would support their chemical companies to this extent.
We have moved our portfolio to companies with expanded capacity through reengineering to become cost-competitive. We monitor volume expansion and margin every quarter. We are overweight a few chemical stocks on a bottom-up basis and willing to bear underperformance for some time for long-term prospects.
Most experts ruled out a US recession. Do you agree?
We are not experts on the US economy. It is the largest and most complex economy. As students of economics, we know that when fiscal policy is loose and monetary policy is about to become loose, a recession is unlikely to occur. No ruling party would like to go into a crucial election with a recession. They will do everything possible to keep the economy in fine balance through fiscal and monetary levers. In CY24, the US economy is unlikely to witness a recession.
Do you expect only one interest rate cut from the Federal Reserve this calendar year? Will the RBI follow the same in October if the Fed cuts in September?
The RBI is far more comfortable than the US Fed, as growth is good, inflation is within the target range, and the rupee is stable. They are unlikely to cut rates in CY24, while the market expects the US Fed to cut rates on September 24.
Are you betting big on the consumer space?
We are selectively investing in the consumer space. Companies leveraging distribution, innovative product launches and cutting costs are our preferred choices on a bottom-up basis. While there is some premiumisation ( of buying habits) trade, there is also some mass market trade (value buying).
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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