Exit poll to boost near-term market sentiment; investors eyeing policy reforms roadmap: Nilesh Shah Q&A

Nilesh Shah, MD, Kotak Mahindra AMC

Nilesh Shah, MD of Kotak Mahindra AMC, predicts a short-term market rally following exit polls, indicating a landslide victory for the BJP-NDA coalition. However, he emphasises that sustained market growth depends on the new government's implementation of significant reforms within the first 100 days. In an interview with Mahalakshmi Narayanaswami, Shah said that while domestic investors have shown strong confidence through record inflows, foreign investors will be closely watching for policy continuity.

Edited excerpts:

It looks like a landslide victory for BJP. The markets were nervous for the last few days. What’s your takeaway? Is this surpassing the expectations?

The markets were pricing in the continuity of the government, and at the current valuations, markets are pricing not only the continuity of the government but are also looking forward to announcements of big bang reforms in the first 100 days. The exit polls are a little ahead of expectations but the most important thing after the election results will be what kind of reforms India unleashes, which can justify current valuations.

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What do you expect the immediate impact, considering that the mind of the market has been positive except for the last few days? With these numbers, should we expect a circuit up on Monday/ Tuesday?

A circuit up looks unlikely. If we divide the market between investors and traders, then the investors are loaded on to the market. There have been a record amount of inflows from domestic investors. And while FPIs have taken some profits, as a percentage allocation of India in their portfolios, it is a fairly large number. There are very few investors who are waiting on the fence -- many of them have taken a bet on the continuity of the government and reforms. From a trader point of view, some profit booking or reduction of positions has happened. They are likely to go long on the exit poll and results, in the anticipation of bigger reforms.

In the short term, the market can go anywhere. But we are trading at a premium to every emerging market. We are trading at 3x the valuation compared to China. These valuations are optimistically pricing in a very good budget and big bang reforms in the next 100 days, which will sustain India’s growth trajectory.

We hear that some funds have received higher inflows in the last few weeks. Do you see some traction where investors are taking a tactical 1-month bet on the markets? And secondly, what’s your sense of how much money from savvy investors is waiting in the wings to avoid the election risk, which will come back in a rush to the markets with this victory?

In mutual funds, we are seeing SIP culture taking off, because of which, there is a regular funds inflow. Whenever there is a profit booking for some personal purpose, we see reduction in flows. And when redemption stops, we suddenly see an increase in flows. In the last two months -- April-May -- we have seen very less reduction and hence higher inflows into equity mutual funds.

There is a ‘sell India, buy China’ trade that’s been happening. With this verdict, do you see a lot more foreign investors waiting in the wings getting more confidence about policy continuity, coming back in again in a rush?

I believe most large reputed investors have positions in both China and India. If we can ensure that our weightage in the MSCI Emerging Market Index continues to rise, there is no way foreigners will ignore India with this kind of mandate and the reforms we are taking. Do remember that they have enough money to allocate between China and India together. For example, if Korea gets upgraded from MSCI Emerging Market Index into the developed market, our weightage will consequently go up by 1 percentage point. If HDFC Bank gets included at 100 percent weightage instead of 50 percent, that's another 1 percent weightage in the emerging markets index.

Will the small cap rally continue given the recent scare around valuations in March, and the subsequent return of money into these funds after a marginal outflow? Considering the ongoing positivity and the new government, what factors could potentially halt this frenzy?

Legendary US Fed chairman Alan Greenspan said that it is always difficult to predict a bubble; it's much better to clean up after the bubble has burst. Another legendary investor said that markets can remain irrational longer than you can remain solvent. We as fund managers can take a call on what looks expensive relative to historical valuation, or global peer group, or potential earnings growth. But markets will always swing between undervaluation and overvaluation.

I do admit that Indian investors have matured a lot. They say, ‘don't worry, the long-term India growth story is good’. I hope and pray that we continue to deliver on growth, governance and green transformation of India. For the first time in many years, I have seen that actual earnings delivery is more than what was estimated at the beginning of FI24. If we can maintain that trend, then the corrections will be far short-lived. And every correction will be a great opportunity to buy as long as you have enough time horizon.

The adage 'buy on rumour, sell on news' seems relevant, considering the recent market rally in the run up to the election verdict. If the election results are favourable, could this be a turning point? Will the positivity last, or will attention shift to upcoming events like the budget, or market apprehension about potential policy changes such as capital gains tinkering?

Investors do believe in the maxim ‘buy on rumours, sell on news’. But those investing in India are not buying just on the rumours of results. They are buying for India’s journey from the fifth largest economy to becoming the third largest economy. For them, every correction is going to be an opportunity to invest.

From traders’ point of view, many of them already lightened their positions. Reports suggest that even some FPIs have taken short positions. Retail Indian traders are mostly long in derivatives.. There might be a short covering from FPIs, but this is just from a trading point of view. It's not going to impact the market on a material basis.