Market signals mixed; stay neutral on equities with a long-term view, says Nilesh Shah of Kotak AMC
Maintain a neutral allocation to equity with a long-term view. Increase exposure when valuation is cheaper, especially in small and mid-caps, says Nilesh Shah of Kotak AMC.
Nilesh Shah, MD of Kotak Mahindra AMC says there are mixed signals in the market for various segments. While there is a green signal for large caps, there are red signals for micro, mini-caps and SMEs. In an interview with Mint, Shah recommends investors should maintain a neutral allocation to equity with a long-term view while keeping some cash to increase exposure when valuation is cheaper. Edited excerpts:
What is your outlook for the Indian market for this year? What are some of the key triggers for the market now?
Different signals are there in the market.
There is a green signal for large-cap trading at a slight premium to the historical average. Yellow signals for small and mid-caps trading at a higher premium than the historical average. There are red signals for micro caps, mini caps and SME exchanges where valuations are at a significant premium to historical averages.
India is trading at a premium valuation about eight times higher valuation than Russia, three times higher valuation than China and twice that of Brazil and South Africa.
Such a high valuation requires the consistent meeting of the market expectations.
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Apart from usual triggers, one event that we have to watch out for is whether our peers continue to score self-goals.
India is valued at a premium to peers as not only are we doing well, but also others have scored self-goals.
Russia’s conflict with Ukraine has pushed global investors to exit the market.
China’s struggle with the real estate sector and Taiwan is keeping investors on tenterhooks.
If our peers get their act together like us, then we will have a competition to attract flows.
The domestic market has been on a volatile track of late. How should investors navigate troubled times?
Implied volatility in the derivatives market and the risk premium of the Indian market versus peers indicate that volatility has reduced over time.
Investors must remember that equity markets are not linear. They should follow the dharma of asset allocation to make volatility their friend.
Is it time to increase exposure to equities?
We recommend investors maintain a neutral allocation to equity with a long-term view.
Keep some cash to increase exposure when valuation is cheaper, especially in small and mid-caps.
Is the rally in mid and small-cap space overdone? If they undergo a consolidation phase, what magnitude of adjustment might be anticipated?
Undoubtedly, in many mini caps micro caps, SME companies' prices have run up well ahead of fundamentals.
Investors must exercise caution in low-floating stock shares where valuations are stretched.
It will be fair to assume that in good governance companies, time correction is more likely.
In bad governance companies, price correction is more likely.
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How do you see the inflation and economic growth trajectory for this year? When can we expect rate cuts?
The inflation subject to normal monsoon should be well below RBi’s upper target range of 6 per cent.
Growth should remain strong, pushing India towards becoming the third-largest economy in the world.
The RBI, having acted proactively on inflation, has the luxury of waiting for how the US Fed and other central bankers behave.
The market expects inflation to be in the 5 -5.5 per cent range for CY24 and growth in the range of 6.75- 7.25 for FY25.
The RBI will cut rates based on incoming data in the Q4 of CY24 post moves by the US Fed.
Do you think the US may see a significant economic slowdown this year? How could it impact the domestic market sentiment?
The US is facing an election in November 2024. President Biden is unlikely to go to an election with a significant economic slowdown.
The US is running large deficits (over $2 trillion) and debt to support growth.
We expect a K-shaped recovery in the US and a soft landing of an economy as the Fed navigates the “ higher for longer" monetary policy to “accommodative" policy.
Is there more steam left in the PSU banking space?
PSU bank sector has been re-rated upwards on the back of a clean balance sheet and strong liability franchise.
Some of the PSU banks have risen on the back of low floating stock and cheap valuations. From here onwards, PSU banks will be driven by their fundamentals.
What sectors are you optimistic about at this juncture? What makes you confident about them?
Domestic Growth will be higher than global growth. Premium products will do better than the mass-market products.
Keeping these two themes in mind, domestic cyclicals like auto, cement, manufacturing, and real estate should do well.
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Disclaimer: The views and recommendations above are those of the expert, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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