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Invest 80% of the capital in equities if you are 25-year-old: Kotak Mahindra AMC

Q1 is likely to be a mixed bag with some companies (IT/ Infra/ Cap goods) outperforming while consumption led companies could underperform

July 23, 2019 / 03:00 PM IST

Markets discount future developments and if the future is bright, current uncertainty will be disregarded. It is appropriate to bet in favour of Indian enterprise rather than against it, current uncertainty notwithstanding, Anshul Saigal, Portfolio Manager & Head- PMS, Kotak Mahindra AMC, said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpts:

Q: Markets went downhill soon after the Budget was announced earlier in July. Lack of liquidity is a big roadblock in front of the government. What are your views?

A: The budget has not inspired the markets. Having said that, this government has always positioned the budget as an exercise in accounting, where the governments P&L and balance sheet is presented.

During NDA - I period, policy actions were taken post completion of the budget exercise. We expect a similar modus operandi this time as well.

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The system has been squeezed of liquidity in recent times, which has affected corporate India’s performance. The budget attempted to address this issue through two decisions in particular:

1. 10 percent first loss guarantee for debt given to NBFCs up to Rs 1 lakh crore

2. Capitalisation of PSU banks by Rs 70,000 crore

These measures indicate that the government is fully seized of the liquidity woes of the system. There are other measures that the establishment could take subsequently to address liquidity issues.

Current liquidity crunch being the biggest roadblock to growth needs an urgent fix and any government action in this direction will be a trigger for the markets.

Q: Indian markets are trading near the higher end of valuations. Do you think it poses a risk for investors?

A: In good times for the markets, risks are under weighed and when markets are choppy, risks are over-weighed. It is this over-weighing of risks that make prices attractive and vice versa.

Corporate governance is an issue of utmost importance. It should be equated with malfeasance to the detriment of a business or minority shareholders.

It should not be equated with bonafide decisions gone wrong. In periods of market volatility, no distinction is made between these two aspects.

Additionally, markets cheer improvement in future corporate governance standards, even if questions have been raised in the past.

Valuations in the markets have been expensive in a select set of companies. The broad markets have seen a serious correction in valuations over the last 18 months.

Markets discount future developments and if the future is bright, current uncertainty will be disregarded. It is appropriate to bet in favour of Indian enterprise rather than against it, current uncertainty notwithstanding.

 

Q: SIP flows are showing an encouraging trend even at a time when most MF schemes have given negative returns. What is your outlook?

A: Indian investors sense that the current market weakness is a passing phase and that long term economic trends are quite upbeat. Structural reforms like GST, Jan Dhan, Aadhaar, IBC, etc. are shifting the economy toward a more formal trend and away from the undeclared informal economy.

We believe that in anticipation of a rising economic trend, SIPs continue to flow through. Also, the Indian investor is maturing with time – but one should realise that past market trends may not have any bearing on future market direction.

Q: If someone wants to invest Rs 10 lakh now, what should be the portfolio contribution with respect to equity, FDs, gold and debt?

A: This will be a function of the investors’ age and financial position. For example:

60-year-old retiree:
- 40 percent debt
- 20 percent FDs
- 20 percent gold

- 20 percent equities

25-year-old
- 80 percent equities
- 10 percent gold

- 10 percent debt and FDs

Reason being that the former should try to save capital, while the latter should need to generate capital.

Q) What are your views on the auto sector? 

A: Auto sector is witnessing a business slow down as a direct consequence of weak consumer sentiment and a tight liquidity situation. Besides, the industry will need to adjust to emerging trends like the advent of Electric Vehicles (EV). These uncertainties are reflecting in weak stock prices.

We perceive this weakness to be a cyclical slowdown in a secular uptrend. We anticipate that over the next 2-4 quarters, weak business sentiment should witness a reversal. In the interim, valuations will become favourable for the long term investor.

Q: Do you think government's decision to borrow in foreign currencies could be a game-changer?

A: Borrowing abroad is tapping an additional source of capital, which so far went untapped. It is a departure from the current position of the Indian government but should not be perceived as a game-changing development.

Implications are:

Pros:

1. Access to cheap capital at a time when global yields are near all-time lows
2. Pressure on domestic yields eases, given the aggressive borrowing program of the government
3. May be perceived as an initiation toward eventual capital account convertibility

4. Some Emerging market peers are heavily exposed to USD debt (having up to 1x USD debt/GDP) while India has nil USD Debt thus offering room to raise USD debt

Cons:

1. Given the depth of global debt markets, there could be a temptation for excessive global borrowings. This has been the cause of many countries facing economic stress in times of uncertainty

2. Could expose the rupee to currency volatility and manipulation

Q: Due to new tax proposal in budget, KPR Mill announced the withdrawal of buyback of 37 lakh shares announced in June. Do you think there will be more decisions like these?

A: With the current tax provisions on buybacks, we don’t envisage enthusiasm for buybacks. Reason being, earlier capital gains were applied at the investors' end. Now that will not be applicable.

A 20 percent tax will be applicable at the company’s end on total buyback amount. Earlier, the investor paid 10/15 percent tax on Long Term/Short Term gains, respectively. Now the investor pays 0 percent and the company pays 20 percent on the buyback amount. ‪

In a buyback, the investor gets 10 percent less if gains are long-term and 5 percent less if gains are short term. This disincentivises buyback, as a pay-out tool, also as an accumulation tool when stock is cheap.

Q: What is your call on June quarter earnings? 

A: It is likely to be a mixed bag with some companies (IT/Infra/Cap goods) outperforming while consumption led companies could underperform.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Kshitij Anand is the Editor Markets at Moneycontrol.
first published: Jul 23, 2019 12:46 pm

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