Daily Voice | Trinity of these 3-Gs will help India sustain premium valuation over peers, says Nilesh Shah of Kotak AMC

Market Outlook

Last budget provided healing touch to the economy. The Union Budget FY23 has to capitalise on that for better growth and equitable distribution, and should encourage consumption through urban MNREGA, said Nilesh Shah, Group President & MD at Kotak Mahindra Asset Management Company in an interview to Moneycontrol.

He further said that the Budget should raise revenue through non-tax resources like asset monetisation and divestment.

Shah has over 25 years of experience in financial and capital markets, and has managed funds across equity, fixed income securities and real estate for local and global investors.

Kotak MF believes that India will continue to trade at a premium to peers. “The differentiator for us is Growth, Governance and Green. This trinity will sustain our premium valuation over peers,” Shah said. Here are the edited excerpts from the interview:

Do you think there could be more corrections in coming months given the Omicron worries, expected rate hikes and liquidity tightening? Also is there any possibility of double digit returns in 2022 in comparison with 2021 (up 24 percent)?

It is always difficult to predict market movements. The golden rule is that if events turn out to be better than expected by the market, it rises and vice versa.

Market today, has discounted that Omicron will not result into lockdown or significant disruption in economic activities. Market has also discounted that the RBI as well as other Central Banks will move away from soft monetary policy in a calibrated manner with a pro growth bias. There is a need to moderate return expectations in CY22. If the scenario discounted by the market plays out, then there is a good chance of low double digit returns in CY22.

The market has seen the first biggest correction since the beginning of the bull-run last year. Have you spotted any themes that one has to consider for investing in the current free-fall, for 2022, and why?

A 10 percent correction by no means can be termed as big. There is no free fall in the market. Volatility, corrections are part and parcel of the market. In Kotak MF view, few themes can outperform the market in CY22 and beyond. Kotak MF believes that Industrial and Capital Goods sector will outperform the market. These companies have cut costs and improved productivity to survive in the downturn of last few years. Now, private capital expenditure cycle is likely to begin. There are opportunities in exports market also. These companies will see volume expansion through better order flows and higher margin through operating leverage.

Home improvement and housing is another sector to consider. Housing affordability has improved as house prices have stagnated/declined over last few years. Interest rates on housing loan are at record low levels. Many would like to renovate their house as home improvement was deferred during Covid-19. Kotak MF believes that housing sector will witness accelerated growth in the days to come. The best way to play that cycle will be through good quality companies engaged in Cement, tiles, paints, wires, plywood, white goods companies.


What are the major events to watch out for in the coming year 2022?

CY21 started on a strong FPI inflows but ended on outflows. CY21 started with the hope that Covid-19 will be behind us. The second wave put huge stress on everyone. It is ending with a normalised life. CY21 taught us to be prepared for all uncertainties. Don’t take any thing for granted. Life and market both will be predictably unpredictable.

CY22 will be impacted by many events some of which cannot be predicted. Currently the events to watch out will be:

a) Will Omicron create significant disruption in economic activities

b) Will US Fed raise rates more aggressively than priced by the market as inflation is rising and US Fed seems to be way behind the curve

c) Will budget be Reformist or Populist

d) Will December 21 quarterly results be higher / in line with expectations or below the expectations

e) Will FPIs stop selling and start buying

These events and many more will continue to impact the market in CY22

With less than a month left for the Budget, do you anticipate any big bang announcements and what could be the focus areas? Also, in the view of upcoming state elections, do you think there will be any populist measures?

Last budget provided healing touch to the economy. This budget has to capitalise on that for better growth and equitable distribution. This budget should encourage consumption through urban MNREGA. It should support Growth by supporting housing sector. It should raise revenue through non-tax resources like asset monetisation and divestment. The budget has to focus on equitable distribution. The recovery is K shaped with sectors like MSME which have been hit hard. Those vulnerable sectors need healing touch. Those measures can be called populist but are needed.

Will India continue to enjoy a premium to most emerging markets in 2022 and why?

Kotak MF believes that Indian will continue to trade at a premium to peers. The differentiator for us is Growth, Governance and Green. Our country is likely to be the fastest growing major economy in the world. Corporate sector profitability is likely to remain elevated in years to come. Our Governance practices are better than peers. We are committed to ESG principles. We are growing with focus on green and governance. This trinity will sustain our premium valuation over peers.

Given the rising expectations for three rate hikes in the US in 2022 and liquidity tightening to control inflation, do you expect the RBI to think of rate hike in the second half of 2022 or will the RBI continue to priortise growth?

US Fed is way behind the curve with excessively soft monetary policy. They need to do course correction quickly. They have deferred rate hikes to 2022 and beyond despite inflation running in high single digits.

For RBI, the situation is well under control. Our inflation is lower than US inflation for last few months. It is well within target zone of the RBI. The RBI may depend on data. They have managed the conflicting objectives of Growth and Inflation in an unparalleled manner. Kotak MF estimates that the RBI will reduce reverse repo and repo rate corridor and move policy stance from accommodative to neutral before raising repo rates. The Bond Market has already discounted the potential hikes by steepening the yield curve.

What are the great lessons you learned from 2021. On that experience, what is your advise to newage investors for 2022?

Learning is a never ending process. The greatest lesson from 2021 was to be ready for any uncertainty. Don’t take things for granted. It also showed the importance of discipline. The discipline of masks and vaccination saved people from Covid-19. Same way controlling your fear and greed helped making money in the market.

To new age investors my humble suggestion will be to participate in the growth story of India through investment in good companies. Let your profits run.

If a 25-30 year old investor is looking to invest Rs 10 lakh this year, how should he/she go  about it or create his/her portfolio to get healthy returns?

The general rule is to invest as per your risk profile and investment objectives. There will be different allocation for a 25-year old investing for vacation next year, getting married after three years, buying a house 10 years down the line, providing for capital to start a business after 15 years or providing for retirement after 30 years.

My suggestion to the young person will be to follow a disciplined asset allocation approach suitable to their risk profile and investment objective. Be an investor rather than a trader.

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