Surprised by market upmove post cash ban; buy stocks: Kotak MF

“Equities are placed well,” he said. “Patient investors will make money."

He said the impact of demonetisation was visible in the results of auto and consumer durable companies. He said though their numbers were not so bad, they could have done better.Below is the verbatim transcript of Harsha Upadhyaya’s interview to Anuj Singhal, Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Anuj: Do you get a sense that this market is now likely to correct a lot of underperformance of last year?A: We will have to wait and see, I think the short-term outlook is still hazy, it is dependent on many events such as our Budget, what the policies are going to be in the Budget, what the state elections will tell you and there are also global cues such as what happens in US in terms of policies etc which will drive markets in the very short-term. Having said that even during demonetisation drive, we clearly felt that the impact is going to be only short-term and after a short-term hiccup things will gradually improve and that is what is happening now. Although, I must say that we are also surprised by the pace of recovery in terms of stock performance. We were not too negative in terms of that impact lasting longer than few months and now most of the people also believe that most of the impact is going to be very short-term and hence I think there is some amount of buying that is happening in the market. As you rightly mentioned, mutual funds have been getting consistent inflows into equity funds and that is also getting invested at various levels I should say.Latha: We were just speaking with Jim O\\'Neill a little while back and he pointed out to a fact that after many years, probably after 2006 or 2005 global growth is almost going to touch 4 percent this year that is his guess. We have been lingering at 3 percent and below for the intervening years. Will this mean that there could be a big equity rush, I mean would the FII trend turn positive now for Indian equities in particular?A: We have been debating quite a bit on foreign institutional investors (FII) flows for last few quarters in terms of what will happen to FII flows once US Fed starts raising rates in the new year etc. But, I think the focus is required even on the domestic flows. If you look at the flows that have been there on the domestic side for example in November and December put together the domestic mutual funds have got about Rs 20,000 crore that is not a small sum. So, irrespective what happens on the FII side, I think there is a healthy and consistent flows that we are seeing on the domestic side thanks to systematic investment plan (SIP) numbers which are touching almost Rs 4,000 crore a month now. There is consistent buying from employee provident fund organisation (EPFO) and other pension trust, so all in all about Rs 5,000 -6,000 crore one way flow is happening every month into the market by domestic mutual funds. This number can only go up with the fact that lot of money has come back into banking system after demonetisation and even if you assume a small percentage remains in the deposits slowly that money will move into equity markets because in absolute terms and also in relative terms, equities are going to be the best asset class compared to what returns you are going to get on fixed deposits, savings deposits or even in some cases debt mutual funds. So, to that extent I think equities are placed well, the fundamentals are turning around and if there is patient investor he is definitely going to make money. Sonia: You were telling us how the demonetisation impact has not been as severe as one would have expected. Where have you seen it in earnings this time? A: It has been visible in some of the auto companies, some of the consumer durables. There results could have been much better than what we have already seen because only 45 days I think they had very good demand scenario. Post that there was some sluggishness definitely across the board. Our belief is even the numbers that have come out are not so bad and it is more or less in line with the lowered expectations that were there in the market. So, to that extent market has not been seeing negative sentiments and everyone believes that through this quarter we should see more normalisation happening across the board maybe except some high-end consumption such as luxury, automobiles or maybe real estate. I think the rest of the sector should see normalcy in terms of demand drivers. Anuj: Your thoughts on NBFCs because we have seen a huge rally in NBFCs. It was one of the leadership sectors of course before demonetisation, then we saw big de-rating and like we saw with Bharat Financial Inclusion the market is ready to move on. Your thoughts on this space?A: We have been very selective within the NBFCs space and we are focusing more on consumer centric NBFCs rather than the entire basket of NBFCs. Within financials, we clearly favour retail banks and retail NBFCs that has been a tilt in our portfolio and even post demonetisation that tilt has not really changed.Sonia: What about some of these other consumption companies whether it is a cement companies or paint companies? Paint companies have not seen a big recovery post demonetisation. You think those are next in line to see a huge bump-up?A: Home building materials will definitely start to see revival in demand in our opinion. May be it will take couple of more weeks, couple of more months, but definitely those which are helping home construction will definitely come back in terms of demand. We have already seen cement numbers being quite strong in some regions. Fortunately, we had overweight position in our portfolios and we maintain that through the demonetisation drive. We are happy that we didn’t see much of a business impact or the stock market impact for cement companies. Our belief is even home building materials will start seeing better demand scenario. Latha: Basically, what are you expecting in terms of equity returns this year or at least first half and what will be your leaders for the first six months?A: Our belief is FY18 we should see earnings growing by about 14-15 percent. If that were to come by, I think markets are fairly valued at this point of time. So, you can expect market performance broadly in line with earnings growth expectations. In terms of first half, second half while it is very difficult to predict how the markets will behave in the short-term, but our belief is the first half could be little more range bound compared to second half. Second half is where you will start seeing earnings numbers really showing year-on-year growth and that is when probably markets will be much stronger. That is our opinion at this point of time. What should move the markets ahead? I think clearly the consumption oriented sectors will come back if you just forget demonetisation for a moment, we had tailwinds in the form of 7th pay commission, OROP and also monsoon was really good last year so rural demand was also picking up so all this happened until the festive season and then we had demonetisation which in a short term actually impacted some of the demand conditions. Our belief is those are only temporarily and we should see revival in demand for most of the consumption oriented stocks. Similarly, the push from the government will continue to be there on infrastructure, affordable housing, construction of roads etc. so I think cement should continue to see good demand.Anuj: Pieces which have not done well are the export oriented companies or the ones which are exposed to the US more particularly IT and pharma. In that how would you approach because it is more stock specific and I know you won’t be able to talk stocks, but how would you approach these two big spaces?A: Clearly, we continue to remain underweight on both. On IT the business conditions have been really challenging, at the same time we also have concerns on the US policy in terms of what they will do on outsourcing what will be the increase in cost etc. so clearly the headwinds are really in front of us. There is no need to be over weight on that sector until some of these conditions improve or the valuations further correct. One caveat here is most of the IT companies are sitting with large amount of cash on their books and in case they decide to do a big acquisition which is very meaningful or if they start distributing that back to the shareholders we could see some revival in stock performance. Until then I think it will be a tough ask.Similarly, on the pharma side we have seen various challenges including that regulatory issues. The investigations that are going on in US etc. so it is very hard to believe that the valuations will re-rate at this point of time without clarity on some of those issues. Once that clarity emerges even if you have to buy some of the stocks at 5 percent, 10 percent higher it is better to do that rather than jumping in now.