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Last Updated : Nov 28, 2016 07:57 PM IST | Source: CNBC-TV18

See better buying opportunities in 1-2 months: Nilesh Shah

Nilesh Shah, MD, Kotak Mahindra AMC is confident that market will not move in a unidirectional manner but would remain volatile, adding that although he has not turned bearish on the market, he would focus more on ground realities.

Nilesh Shah, MD, Kotak Mahindra AMC is confident that market will not move in a unidirectional manner but would remain volatile, adding that although he has not turned bearish on the market, he would focus more on ground realities.

The situation on the ground is very fluid; things keep changing everyday, said Shah.

He said, market is likely to give better buying opportunities at lower prices going forward maybe in a month or two. He does not prefer buying them now when FIIs are selling at higher prices.


With a move to managing the excess liquidity in the system banking regulator Reserve Bank of India announced that it would absorb a part of this extra cash by applying an incremental cash reserve ratio (CRR) as a purely temporary measure.

Shah said this move could definitely lead for some correction in public sector and private sector banks and more so, because they have run up already and there will be a further burden on their balance sheet.

This move also creates doubt among minority shareholders that are being taken for granted, said Shah even though RBI has come out with the clarification that it's a temporary move.

However, the move could have been done to stem the downward movement in interest rates, said Shah.

Going forward there are many events lined up for the market - events like the RBI and US Federal Reserve meet to decide on interest rates. Then, later on, our own Budget and the road to fiscal prudence.

With regards to interest rates, he said they are factoring in a 25 basis points rate hike by Fed in upcoming December meet and a 25-50 basis point cut by RBI.

Sector specific, he said, despite strong momentum in IT stocks which are more driven by cheap valuation, the overall scenario is still worrisome.

Below is the verbatim transcript of Nilesh Shah’s interview to Anuj Singhal, Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: Your thoughts, the Saturday killer cash reserve ratio (CRR) seem to be ameliorated a bit with Urjit Patel telling PTI that this measure is only till market stabilisation scheme (MSS) bonds are approved so what should we prepare for today?

A: One, there will be some amount of correction in public sector undertaking (PSU) banks and private banks because they had rallied a lot because of this deposit accretion. It might be temporary, but still there will be burden on banks’ balance sheet.

From an equity investor point of view, there will be one question at the back of the mind, not necessarily at the front that banks which have already taken a fair amount of burden in terms of overtime to their staff in terms of administrative expenses to do this activity on demonetarisation why are they being burdened with just about let us say Rs 500 crore, Rs 35 crore a day on this excess CRR.

Couldn’t Reserve Bank of India (RBI) have absorbed that cost and spare bank the profitability? As minority shareholder people will be worried at the back of their mind that will government take minority shareholder for granted. Of course, RBI is quick in clarifying that this is temporary measure and since parliament is in session probably notification can’t be done and hopefully they will get approval for MSS, which will be interest bearing. However, yes, at the back of the mind doubt does come will minority shareholders be taken for a ride.

Sonia: That brings us to the larger point about the entire demonetisation impact, right. Now it is banks, earlier it was toll roads, company demand is getting hit, so overall it seems like the impact is slightly larger than one would have anticipated earlier. How have you read into the situation between November 8th and now and do you think the worst for the market is yet to come?

A: My feeling is that the situation is too fluid and it keeps on changing every day. We are meeting lots of people on the ground and trying to take their feedback. Obviously, in the first week of November 8th onwards there was massive corrections in automobiles, cements, real estate and gold jewellery. There was impact on even day to day consumption items as some of the fast moving consumer goods (FMCG) companies gave the feedback. However, now things seems to be stabilising, so it is too early to predict what will be the impact on to the corporate results and on to the market.

However, my feeling is that we will have to be far more flexible in our approach and market will probably be volatile rather than in a particular direction. It will neither keep on going down nor keep on going up. It will be moving up and down based on how the data keeps on coming.

Anuj: Could there be a case of the market seeing buying on bad news? For example the banks today, we have seen how some individual sectors have bottomed out, could this be the case of banks also bottoming out with bad news, do you sense that happening?

A: My feeling is that we are in for some of the events going forward. Immediately, on December we will have two announcements from US Fed as well as RBI. Now in Fed’s case we have factored in 25 basis point but we will be interested in what kind of guidance they will give. Will it be like to 2015 pretty aggressive or will it be data dependent; post that we will be waiting for RBI and today’s government yield, probably, market expected in 50 basis point rate cut rather than 25 basis point rate cut.

In between you have Italian referendum which will create again doubts about European Union sustainability. Post that we have Budget where whether we will be able to honour fiscal prudence or not. So, there are so many events lined up that it is unlikely that markets will bottom out in a near future or particular sector will bottom out in a near future.

It will be important for investors to take a call over at least six months to average in to the market rather than buying aggressively at today’s correction.

Latha: I have been crying hoarse that the rupee has been one of the most resilient currencies. Nevertheless it has also been a carry currency. It gave the best returns because of its stability. Now if the interest rate differential crunches too soon too much, US hiking and we cutting by 50 basis could that resilience of the rupee be lost, will there be turbulence?

A: In fact one of the reasons why RBI probably has taken this step on CRR could be to stem the downward movement in the interest rate. We have seen foreign institutional investors (FII) selling and booking their profit. They have made money on the rate side, they have made money on the capital appreciation side and they haven’t lost as much money on the currency depreciation side as in some other emerging market. So, they are sitting on huge amount of profit on a non Index security and over last 20-25 days we have seen them consistently selling government securities and taking their profit out.

Maybe in the fixed income spaces markets have moved little bit ahead of their fundamentals. It has priced in two quick rate cuts from RBI, the yield curve below repo rate probably is little bit unnerving RBI and hence they could have taken these steps whereby yields could back up a little bit and the FIIs don’t take out their money easily.

Sonia: Compared to when we spoke with you last you seem to be a bit more bearish now. Do you get a sense that the Brexit day low of 7,930 or so could be broken in the near-term?

A: I don’t know how to predict short-term market. I haven’t become bearish, maybe I have become more realistic based on the feedback, which we receive on the ground. There are host of events, which are lined up and which kind of gives us confidence that markets are unlikely to be unidirectional. It is going to be volatile. It will give you enough opportunity to accumulate your stocks.

Anuj: Are you saying we will have better opportunities over the next one or two months to buy stocks than today?

A: My guess is yes, we will see better opportunities to accumulate stocks. This is not the market where you just wipe the market clean. The FIIs are selling and if they are selling why should I give them an exit. I will rather buy at a lower price from them. There are events which are going to keep markets volatile. So, it is time that you build your portfolio over a period of time rather than cleaning it up in one day.

Latha: Do you expect IT stocks now to once again regain their flavour?

A: Even in IT sector despite the current strong momentum, which we believe is more driven by very cheap valuation, the overall scenario still continues to remain worrisome. Clearly, there is a transition, which companies have to make. I will just quote one figure from one of the veteran of IT industry -- in his own company they have about 200 thousand employee covering 250 clients, which gave 87 percent of revenue out of total 100 customer base.

On the other hand there is a product company in Germany where about 70,000 customer service 250,000 clients. I mean obviously we are comparing apple to orange, but it shows the kind of journey which Indian IT companies will have to make from being service oriented to being product oriented; from being servicing few customers for large amount to service many customers for small amounts. So, that transition is going to take time and which is why again in IT sector you will get enough opportunity to accumulate over a period of time.

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First Published on Nov 28, 2016 09:40 am
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