Markets globally had been looking for a reason to correct -- which they got thanks to the Bank of Japan's move to stand pat on monetary policy -- but any fall only accentuates the appeal of Indian shares, says Nilesh Shah, Managing Director of Kotak Mahindra Asset Management Company.
In an interview with CNBC-TV18, Shah said there were many positives going for the Indian economy that would lift stocks. He, however, a conceded that a bad monsoon, unlikely as it looks currently, would be an upset for markets.
"The government has adopted fiscal prudence while the Reserve Bank has decided to ease liquidity conditions," he said. "This is a reversal of six years of policy."
He also discussed his view on various sectors such as capital goods, which he said should post good returns but with a lag, and NBFCs and rural FMCG, which he considers expensive at current valuations.
Below is the verbatim transcript of Nilesh Shah’s interview with CNBC-TV18's Sonia Shenoy and Latha Venkatesh.Sonia: We spoke to you less than a week ago and you had indicated to us how you are not at all perturbed by the global volatility and this is perhaps a good buying opportunity. But since then things have gotten a bit worse globally at least. What is the sense you are getting that would we have to reckon with a bit more cuts before the market starts to resume its uptrend?A: Definitely. I did mention that in the first half normally the good quarterly results come out and the second half the bad quarterly results will come out and that those quarterly results coming out with bad numbers could probably drag the market down. Market was looking for a correction and the catalyst on that day was Bank of Japan (BoJ) not releasing more than anticipated liquidity, now we are seeing that correction phase coming on.One interesting risk which has probably come now is the fact that dollar has weakened against many other currencies and that creates room for Fed to increase rates and we have invariably seen that when Fed is raising rates there could be an impact on emerging market (EM) inflows. So, this is one added risk courtesy the weakening of US dollar. But I still stand by my earlier view that this correction provides probably a better opportunity to invest into the market going forward for Indian market despite globally volatility there are many positives which could lift the market on a gradual basis at a higher level.Latha: Actually now that the markets have started declining the big thought for an investor is does it plumb further lows or does it get arrested. We get contrary views. Yesterday Rakesh Jhunjhunwala was saying he would be very surprised if it went to even 7200-7300 levels. Before that we had the Ambit guys telling us that plumbing of 6900 is not ruled out in their assessment of the economy. What would you advice?A: I really hope and pray that for Indian investors Ambit comes right. It will give us a great opportunity to buy stocks at a very cheap prices. I don't know if god will be that kind to Indian retail investors or not. But as of today the way I see the market probably the February lows which we have witnessed are unlikely to breach unless and until we see a major catastrophe which is not priced in by the market.The base of the market probably has lifted little bit higher because of two fundamental things which market is knowing but is not willing to believe. One fundamental thing was India choosing the path of fiscal prudence. When the world is going towards spending, we are going towards saving. We have seen yesterday Australian central bank cutting interest rate unexpectedly even though the government had created a lot of fiscal space. Both the fiscal and monetary policy in Australia is on the loosening side.India on the other hand has seen a tighter fiscal policy. Market knows this but it is not willing to believe it yet. The Foreign Institutional Investors (FIIs) pre-Budget were net sellers and post-Budget have become net buyers. So, the market is not recognising this important change as much as they should recognise.The second thing is about the liquidity in the Indian economy. From 2010 to 2016 we witnessed on an average minus one percent of NDTL. Now this monetary policy on April 5 Reserve Bank of India (RBI) talked about bringing liquidity to neutral levels. When you bring liquidity in the system growth in trade and commerce industry happens.In the past six year we have run our motor car our economy with hand brake on, now we are pushing accelerator. If monsoon comes favourably we will see benefit of this fiscal as well as liquidity into our economy and eventually into our market.Sonia: The only fear is what if the monsoon doesn't play out as expected. Everyone is pinning their hopes on the monsoons. If it is sub-par what kind of a downside do you see for the markets?A: Definitely, if monsoon is sub-par it is going to have an impact because this will be hat trick of a failed monsoon. In the past that has never happened which gives us one comfort but obviously we just can't rely upon past averages like fund managers' past performance is no indicator of future same way it is true about monsoon. But what we are relying upon the data which is coming from Skymet, it is coming from Indian Meteorological Department (IMD), it is coming based on the ocean temperatures on the Pacific. So, all those data today are at least giving the confident that probably first half of the monsoon, the June rains, might be just average or little below average but July and August should be above average. So, there is lots of hope on the monsoon and if monsoon doesn't come for whatever reason then certainly there will be 5-10 percent correction in the market.Latha: In that case what will you incrementally go long on at current valuations?A: We are believing that this is the market which is more of a bottom up stock picking rather than top down sector. One sector where we have now started witnessing increasingly positive body language is the capital goods sector. We attended annual general meetings of a bearings company, oil engine company, some of the power equipment supplier, construction company, the body language there has now changed for positive. People who are associated with road construction and railways sector and defence sector obviously were more positive but now we are seeing the body language of bearings and those kind of industrial and capital goods companies also changing. So, this is one sector where when the cycle turns around you could really make lots of money and mind you this cycle is not going to turn around in next three months of six months it will take a little longer period of time but then you won't get stocks at these prices.Sonia: The other two spaces that have done relatively well this quarter, one is non-banking financial companies (NBFC) with a lot of them hitting new highs and the other one is fast moving consumer goods (FMCG) makers like the likes of Dabur, Marico etc. Are you bullish on either theme?A: This is the theme which was supposed to be worth playing towards the beginning of the year. We were saying that one can take a call on monsoon based on the potential development of La Nina as well as the government pushing more funds into rural economy and the most important factor being those NBFCs in rural economy related FMCG companies available at lower end of historical valuations.Now, to some extent as the data towards the monsoon started getting reflected and some of the results had come a little bit ahead of expectation this sectors has started running out. So, my guess is that in both these sectors rural economy related FMCG companies as well as NBFCs there is a time for consolidation, they are a good long term story but the hope of monsoon probably has been prices in majoritily.
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