In conversation with Nilesh Shah
Editor’s note: Markets have generated double digit returns post budget. What looked like the fag end of the bull run before the budget was announced, proved to be just a pause. Now that the Budget is out of the way and investor confidence is sky-high, all bearish commentary has abated.
But is everything hunky-dory with the economy or have markets, brimming with confidence, actually run much ahead of their times? Traders and investors have been finding it difficult to decipher the implied signal. To help them better understand the market set up post Budget, we caught up with a market veteran, Nilesh Shah, Group President & Managing Director of Kotak Mutual Fund.
In his eloquent opening remarks, Nilesh termed Budget 2021 to be a Seeta and Geeta Budget, recalling the story of identical twin sisters with contrasting personalities, portrayed in a famous Hema Malini starrer movie of the 70s.
He felt, India has been going through a transition from being a soft nation to a bold nation. Budget 2021 has sent a subtle signal to global rating agencies that, henceforth, India will incur deficits if needed for productive purposes and for the empowerment of its citizens without bowing down to their clarion call for quote-unquote austerity and fiscal prudence.
He went on to place the Budget 2021 in the league of Dr Manmohan Singh’s 1991 Budget and P. Chidambaram’s Dream Budget of 1997. In short, called it’s a game-changer.
While Nilesh was generous in giving 10/10 (ten on ten) to the Budget for its intent, he was quick to underscore the need to ensure effective and speedy implementation of steps announced.
Nilesh drew attention to nuances of Budget announcements and talked about the far reaching impact some simple measures can have on the economy. To expound further, he gave an example of a Budget announcement that allowed women employees to work in all shifts (including in night shifts with adequate protection) in all sectors—manufacturing as well as services.
He felt this move can potentially improve India’s garment exports since factories can now work in two or even three shifts, if required, and will not be constrained by age-old restrictions.
He hailed government’s decision of asset monetization. Another interesting observation he made was the scope for monetizing enemy properties that can collectively unlock Rs 1 lakh crore. These funds can potentially be used for the developmental agenda.
Market valuation and positioning
He spent some time on explaining why markets have been rallying at a blistering pace. According to him, the upmove is underpinned by impressive quarterly numbers announced so far by a number of companies across sectors.
On the backdrop of the on-going vaccine drive, a substantial drop in active cases and resilience shown by corporates, he felt valuations on a trailing basis might look expensive but on forward earnings they look reasonable.
He didn’t foresee a major correction and expected capital inflows to continue.
NRIs looking to invest in India must note…
While speaking about tailwinds flowing in India’s favour at the global landscape, he drew our attention to a fact that India’s forex reserves have been hovering at an all-time high and estimated that the Rupee was likely to depreciate 4% every year on an average over the medium to long term. In other words, NRIs looking to invest in India may bring in money to Indian shores when the Rupee is cheap.
Nilesh’s classic response to profit booking
According to him, booking profit with an intention of timing the market isn’t the right approach. Rather, it should be an asset allocation call. If the equity allocations have deviated substantially from their desired levels due to a market movement, then profit-booking could be the right choice to realign the portfolio.
Insights on Investment Themes
When asked about which themes amongst Infrastructure, Healthcare and PSUs he was confident about; he offered an elaborated view on each of them.
According to him, infra is a high-risk-high-return space and should be explored only by those who understand the nitty-gritty of it. The best way to play the theme of capex revival would be to invest in indirect beneficiaries—companies manufacturing pumps, bearings, machines, etc.
Touching upon healthcare, he explained how different business models and target markets affect the risk-reward scenarios for companies operating within the same sector. He opined that one should carefully evaluate these factors rather than taking a call on a sector or an entire theme.
He didn’t mince his words while speaking about the track record of PSUs from the stock market stand point. He explained that PSU as a theme peaked out in 2004. Since then markets have de-rated PSUs for the right reasons. He couldn’t emphasize more on why government has no business in business but felt privatizing viable PSUs can unlock immense value.
Report card of Kotak Mutual Fund
Nilesh’s take on import duties, self-reliance and M&A
While responding to a question on Atmanirbhar Bharat, anticipated changes in the import duty regime and potential M&A opportunities in India, he explained how crucial it is to take down incompetent businesses rather than support them with artificial props.
He believed import duties is a tactical tool; sometimes it may encourage the import of raw materials and at others, the import of finished goods, depending on the circumstances. However, the general direction for a country like India, which endevours to become a net exporter, is to allow cheaper raw materials to encourage the higher production and export of finished goods.
Thoughts on banking
We asked him about his thoughts on Banking. Like his reading of healthcare companies, he felt business models of any two banks can be completely different and so also their target customers. Thus, one should not weigh all banks with the same scale. That said, he gave us three important criteria for evaluating a bank—ability and willingness (of the bank) to raise cash, credit culture and risk management.
And risks Nilesh highlighted
Answering a question on the potential risks to the current market set up and economic agenda of the government; he highlighted inflation and interest rates as the potential red zones. Nilesh pinpointed that the interest burden has been growing at 17% against the nominal GDP growth of just the 14.5%.
On a combined-basis the centre and state fiscal deficit is around 13%-14% of the GDP and that is undoubtedly a risk, according to Nilesh. However in his assessment, the direction of government spending has been right and he expected such targeted spending to potentially create more jobs, stimulate demand and eventually create an environment where private sector would also participate.
As a corollary to our question on risks, we asked him about the future direction of interest rates in India. According to Nilesh, interest rates may rise in future but gradually and in a calibrated manner.
This made us ask him a question on attractiveness of gilt funds. He believed, dynamically managed gilt funds could perform better, but overall, the returns from this category could be moderate.
In his closing remarks Nilesh termed Budget 2021 and the vision it has laid for the next few years, a high-risk-high-return bet. If India executes well, then the Budget would deliver growth beyond FY22, if not, India may have to pay the price. Nevertheless, he thinks the odds are in favour of India at this point of time, rather than against it.
Important note (Please read as a disclaimer): None of the mutual fund schemes discussed in this article is a recommendation to buy, hold or redeem. So is the case with sectors that might have been referred to. Views expressed herein overtly or even otherwise are solely that of the guest and under no circumstances should be construed as those of Ventura Securities. The only purpose of this coverage is to create awareness amongst investors.
Investing in mutual funds involves risks. Please consult your financial advisor before taking any decision pertaining to your mutual fund portfolio.
You may also like to read: In conversation with Shridatta Bhandwaldar
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