Don’t chase stock market trends for short-term gains: Nilesh Shah

  • Kotak Mahindra AMC MD Nilesh Shah tells Mint that the nominal GDP on CPI will be in low double digits for FY24 and FY25, supporting low double-digit earnings growth

Ram Sahgal
Updated11 Mar 2024, 08:50 AM IST
Nilesh Shah - M.D. - Kotak Mahindra Asset Management Co. Ltd. Photographed on 9 July 2015 by S Kumar/ Mint.
Nilesh Shah - M.D. - Kotak Mahindra Asset Management Co. Ltd. Photographed on 9 July 2015 by S Kumar/ Mint.

Mumbai: Large-caps today present better risk-adjusted return opportunities compared to mid- and small-caps over the next 12-18 months. According to Nilesh Shah, managing director, Kotak Mahindra AMC, banks with strong deposit franchises are poised to outperform, along with automobiles, realty and cement. He also highlighted investor concerns over the regulatory actions in the NBFC space, and the strong possibility of investors shifting to better-governed financial institutions, including banks. Edited excerpts:

Considering the recent regulatory action by Sebi and the RBI, what are the implications for the markets?

The markets will appreciate the actions taken by the regulators to enforce relevant laws and increase compliance in letter and spirit. Without guardrails, the bowling game can't continue for long.

Are small-, mid-, or micro-cap stocks currently in a bubble compared to historic valuations? If so, what's your advice to investors?

The low floating stock counters in small-, mid- and large-caps are in uncharted valuation territory. Due to minimal floating stock, there is a price momentum based on small buying, resulting in valuations going into uncharted territory. A sympathy momentum builds in other stocks. I am unsure whether these companies can raise capital at this valuation. On an average, the markets are a little above their historical valuations as earnings growth is well above historical averages. The Street believes that earnings growth will be strong enough to justify the above-average valuations. I will strongly recommend investors to follow the dharma of asset allocation. Don't chase momentum which will give short-term gain and long-term pain. Sit with your Mutual Fund Distributor or Stock broker and invest for the long term.

An aviation stock with no operations is trading at 40-50....

Undoubtedly, such stocks are pure momentum play. Such excesses commonly result in terrible losses and a valuable experience for investors. As they say, a fool and the money can't stay long together. Invest in those small- and mid-caps where earnings growth can meet or exceed market expectations.

Considering that nominal GDP growth is around 10%, what's the large-cap earnings outlook for FY25?

Nominal GDP is in high single digits instead of low double-digits, as negative WPI is impacting the GDP deflator. India Inc., on an average, benefits from lower to negative WPI. The nominal GDP on CPI will be in low double digits for FY24 and FY25, supporting low double-digit earnings growth. While India Inc.'s leverage is low, falling interest rates can benefit the bottom-line as well as valuations in FY25

Do you expect more funds to restrict flows into mid- and small-cap stocks, as seen recently?

Our board of trustees and asset management company took a call to restrict flows into small-cap funds based on our investment process and fund size. Some fund houses could have a different view based on their process or fund size. I am sure everyone in the mutual fund industry keeps the interests of investors paramount and then makes decisions.

After four years of underperformance, do you expect large-caps to outperform small- and mid-caps? What would be the themes?

Large-caps offer better risk-adjusted return opportunities today, than small- and mid-caps for the next 12-18 months. There will always be some exceptional small- and mid-cap, which will outperform large-caps, and vice versa. We believe domestic growth will be better than global growth, so sectors like auto, real estate, and cement should outperform. Banks with good deposit franchisees will do well on better growth visibility. IT and chemicals are bottoming out, and may provide an opportunity to enter over the next six months.

Will regulatory action on certain NBFCs push investors more toward both private and public sector banks?

Investors are concerned with the regulatory actions in the NBFC space, as reflected in the price correction. As a fund manager, it is difficult to estimate which regulatory provisions are breached and what penal action could ensue. None of the companies disclose such information. Many times, the management is also caught by surprise. There is a very strong possibility that investors will migrate to better-governed companies in the NBFC sector, and also to banks and other financial services companies.

Is the PSU rally justified? Please share your views…

Except for the low floating stock in PSU companies, the rally is justified because of the clean balance sheet, improved governance, better business prospects and cheap valuations. The re-rating of PSU stocks has happened. Now, the majority of them will have to deliver earnings growth to justify valuations.

India's macro data is mixed. GVA is low, but tax growth and lower subsidies have supported GDP growth. Consumer spending is also low. Can this growth be sustained?

We will remain the fastest-growing major economy in the world. This growth is the function of talent staying back in India, unlike the pre-90s when they migrated for better opportunities. This talent has access to capital, unlike previous generations, through the private equity and venture capital ecosystem. We have built infrastructure at an incredible speed, almost doubling it in the last 10 years. The trinity of talent, capital and infrastructure is creating sustainable growth. While it is vital to watch quarterly numbers, don't make the mistake of missing the forest for the trees.

What's the impact of Indian bonds' inclusion in Bloomberg and JP Morgan EM indices?

Global Investors will be able to participate in India's bond market, which, since Indus Valley civilization, has not defaulted to foreigners. It is a win-win for both investors and India, as investors get a credible market to invest in, and India gets capital for growth.

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First Published:11 Mar 2024, 08:50 AM IST
HomeEconomyDon’t chase stock market trends for short-term gains: Nilesh Shah

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