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Journalism of Courage
NILESH SHAH, MD, Kotak Mahindra Asset Management Company, says there is a need to be cautious in the market so that people don’t end up getting swayed by the low floating stocks, prices and valuations in uncharted territory. “This is the reason why the regulator and the mutual fund industry are trying to caution people that if they are coming to small caps, they should not come with last one year’s return expectation, that’s not going to happen,” Shah says in in an interview to HITESH VYAS and GEORGE MATHEW.
“Our valuations are undoubtedly above average but our profit-to-GDP ratio is also more than above average. It is not that there is a big bubble but the road definitely is downward sloping,” Shah says. Excerpts:
The market is not cheap like it was let us say during the subprime crisis in 2008, or even in mid-2022. It is a fairly valued market. The large-cap, mid-cap and small-cap are trading slightly above their long-term historical averages, which is also justified as profits are also above average. We have been growing profits in teens for the last five years. Besides, we are also benefiting from other people’s self-goal. As a global investor, one can’t put money in Russia because of Ukraine. By investing in China, investors have two baggage – one, in the last 30 years they haven’t made any money, and second, tomorrow they can go to Taiwan. In South Africa, it is difficult to visit without worrying about safety. Brazil has good fundamentals but they have a communist government whose agenda is not clear to the market and so, people are waiting and watching. In Korea, one is cautious because it might get upgraded to a developed market. As an emerging market investor, if you were to allocate your money, your only options are Mexico, Indonesia and India.
Our fundamental growth story is looking very good. Now, are there excesses in the market? Undoubtedly, yes. Normally, the valuation of large-cap is the highest, mid-cap little lower, small-cap lowest and micro-cap even lowest. Currently, we are seeing a reverse trend in terms of valuations. Is there a little bit of froth? It is there in low floating stock counters. When floating stocks are limited, you can pull the prices higher, valuation goes higher and that’s where we believe investors are not going to make money.
There are always risks to the market because it is constantly discounting news flow. So, what has it discounted? First, on the global side, the US Fed will cut rates. Now, just for assumption if they raise rates, there would be a correction. The market has discounted the Modi government (after the 2024 Lok Sabha election). If that doesn’t happen, then there will be a reaction in the market. There is an assumption of about Rs 1,125 to Rs 1,150 Nifty EPS (Earning per Share) for FY25. Let’s say it comes out to be Rs 1,300, market will shoot from here; and if it is Rs 1,000, then markets may correct.
So, the market has discounted certain assumptions. Anything happening better than what the market has discounted, it will give a push. Anything happening worse than what the market has discounted, it would result in a correction. Do we have the ability to analyse or predict those things? The answer is no. So, one should try to invest for the long-term, buy good companies with good managers who can grow earnings over a long period, and just stay with them.
Have we reached peak valuation? The answer is no. We are at a substantial discount to what was the peak valuation in the 1990s, 2000s, 2007 or 2018. Undoubtedly, today there is a Triveni Sangam (confluence) of three things – money flow is coming, domestic investors are investing and global investors are also putting in money. Sentiments are positive about India and even the worst critics of India are grudgingly accepting that the country has done good things. This is the first time when even fundamentals are keeping pace with the prices. Companies are generating 15-20 per cent compounded profit growth. Profit growth to GDP ratio is now 4.9 per cent. The banking sector’s NPAs are almost fully provided for. So, there is Goldilocks – flows are good, sentiments are good, fundamentals are good, valuations are above average, and so is the profit.
I would suggest that investors should follow their asset allocation, depending on their risk appetite. A lot of people are chasing momentum. Please don’t copy your neighbours and also moderate return expectations. The market can’t keep on scoring centuries year after year. You have to expect moderate returns from the market; you can’t repeat last year’s performance. Investors should come with a longer-term horizon. Today, everything is good for India and the market has already discounted that. What if there is a surprise or there is a shock?
There is a segment of people who are chasing futures and options, and they are unlikely to make money on a consistent basis. There are people with algorithms and colocation and their reaction is much faster than an average retail investor. This segment is more likely to make money compared to retail investors. There is a class of investors who have matured, but then there is a class of investors who have not matured.
Bubble might be a very harsh word because unlike Harshad Mehta’s time in the 1990s or telecom, media technology bubble in 2000, this time the gap between what you believe is fair value and the prices is not very large. Our valuations are undoubtedly above average but our profit-to-GDP ratio is also more than above average. It is not that there is a big bubble but the road definitely is downward sloping. If you keep on running at the same pace when the road is upward sloping, it is likely that you will accelerate far more than what you are pressing. So it’s time to be cautious. Where is the caution required? There are counters where floating stocks are very limited. In those floating stocks, since the holding is in the hands of few people, even little buying creates a disproportionate rise.
There is a need to be cautious so that people don’t end up getting swayed by the low floating stocks, prices and valuations in uncharted territory. This is the reason why the regulator and the mutual fund industry are trying to caution people that if they are coming to small caps, they should not come with last one year’s return expectation, that’s not going to happen. Second, don’t come with a three – or six-month or nine-month horizon, because in the last three or six or nine months, investors would have made a lot of money. Please come for the long-term. Don’t put lump sum money… one can come via a systematic investment plan or systematic transfer plan. We are trying to condition investors so that they come with the right expectation and hence, they do not redeem halfway; they will complete the full cycle and will get better returns.
The existing SIPs will continue as they are a little bit loaded in favour of small and mid-caps. We are directing people to come to large caps, but there is also a possibility that this flow will go directly into small caps through the AIF and PMS routes which are investing in small and mid-caps. The risk-return trade-off today is better in large caps. If you are investing in small-cap then please take a longer-term view. Every investor is unlikely to have the same rationality; some will be swayed by greed and emotion. We are trying to turn around the fast-moving boat but it will take some time.
Good things people know about our economy. There are three challenges for the Indian economy. So, the suggestion to the government will be that there are about 30,000 megawatts of capacities which are mostly with state electricity boards. These are old plants and not running as efficiently. If NTPC takes over them, refurbishes and manages them well, you suddenly get higher utilisation and there will be a respite. This can be done in six months or 12 months.
The second challenge is consumption. The mass market product sales are not rising as fast as premium products; the entry-level bike growth is not as high as high-end SUV sales growth. Rural consumption is not growing as fast as urban consumption and the bottom half of the pyramid is not consuming as the top half of the pyramid is consuming. Now, how do I create inclusive growth? This can only be done by creating jobs. How do I create jobs? India’s problem is that 15 crore Indians work in agriculture whereas they should be working in industry or services sectors, which is high paying.
The third challenge for us is the private sector investment. Today, the government is taking the lead on infrastructure investments and they have done a wonderful job. They have doubled India’s infrastructure from 2014 to 2024, compared to what was existing before. Now can we push the private sector also to invest? Their balance sheets are fine and they are very low leveraged. Now they should be putting fresh capacity.
India is predominantly a fixed income-oriented society. The RBI has published data on financial household flows, which shows that on a three-year basis, 94 per cent of assets, as a thumb rule, go to a non-volatile or safe zone, and only six per cent go into higher risk assets like equity or equity mutual funds. So, we are primarily a fixed income-driven or safety-driven society. That is the reason why a lot of our savers don’t get adequate returns. Most bank deposits or small savings will give returns which are in and around inflation. Of course, sometimes they will outperform, but I am talking about long-term averages. On equities, you get volatility, but they outperform in the longer term.
Still it’s 94 (percentage of total investments into safe assets) versus six (percentage of total investment into riskier assets). Three per cent has become six per cent, so it looks like it is a 100 per cent jump. This 6 per cent is also coming from the top end of society. The people at the bottom end of society actually need more real return. Where do they go and invest? Many people keep cash which has come down after the Jan Dhan Yojana, or invest in Ponzi schemes and end up losing money, or invest in gold which they have been doing for centuries. People are not necessarily investing in higher risk but potentially higher return assets.
To celebrate 25 years of India’s first gilt fund is indeed a matter of pride for Kotak Gilt Fund. We commit to make that an integral of every Indian’s portfolio. During the last 25 years, the fixed income market in India has seen various challenges such as the Asian currency crisis, global financial crisis, taper tantrum, Covid -19 etc. Various events have led to volatility in rates such as 10 year Indian g-sec at 11 per cent down to 4.8 per cent and then 9 per cent and back to 7 per cent today. Amidst all this volatility, the fund has generated more than 9 per cent return in the regular plan since inception. The challenges have been used as an opportunity and hence the superior returns were generated which could have made an investment of Rs 11 lakh to Rs 1 crore in 25 years.
In the last three years, people have invested close to Rs 9 lakh crore in currency notes. It is like holding ice on a summer afternoon and then worrying about why it is melting. Inflation will always draw down your currency. In our mutual fund industry, there would be some people who would have got lower returns and some would have got higher returns, but we would have delivered an average real return. Yet, the money which comes to mutual funds is half of the currency notes. I have to fight with common men on why they are holding ice on a summer afternoon when there is an air-conditioned cabin (investment in mutual funds) available. We are asking people to come and sit in the AC cabin but people are not coming in.
