Based on valuations, it's time to be overweight on large-caps: Nilesh Shah

Markets saw a relief rally on Thursday after the US Federal Reserve (US Fed) maintained its dovish stance as regards key rates. Nilesh Shah, managing director, Kotak Mahindra Asset Management tells Puneet Wadhwa that India is sufficiently cushioned against the possible rate hike by the US Fed. “It is important to buy equity for long-term when there is a sense of pessimism in the market,” he says. Edited excerpts Personal Numerology

How much event-based risk on account of global developments like Greece, possible hike in rates by the US Federal Reserve, oil prices, etc., are the markets pencilling in?

Our analysis suggests that Fed Futures are not factoring in the hike in the near-term and probably the hike seems to be in H2FY16. It will be fair to assume that US Fed rate hike would be gradual and is reasonably priced in by the market. The spread between US 10-year and Indian 10-year has averaged around 400 basis points (bps) over last 20 years. Currently, the spread is hovering at more than 550 bps. If history is an indicator, then we are sufficiently cushioned against the rate hike Indian stock market astrology prediction

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It will be fair to assume that unlike a Lehman Bros collapse, which came as a shock to market and hence the impact was much more, potential exit of Greece from Euro zone will not be a total shock to the market and hence its impact will be to that extent much lesser. A disorderly exit, however, could see an adverse impact on Indian markets.

Is there more room for a downside in Indian markets from here?

The news of below-average monsoon and below-expectation corporate earnings have been factored in by the market. However, if the monsoon is worse-than-expected, or recovery in corporate earnings is delayed, then the markets will correct once again, which, we believe, will be a great opportunity to invest. There is also the possibility of new events like MSCI increasing weight of China and consequently reducing Indian weight in the EM benchmark impacting our markets. It is important to buy equity for long-term when there is a sense of pessimism in the market Sensex Astrology

How do you see the pace of foreign flows panning out as regards India?

India has lost money in the months of May and June as other markets like China started outperforming India. Some of those markets will start underperforming, thereby creating an opportunity for India to attract flows.

What are your earnings growth estimates for FY16 and FY17?

We expect FY16 to be better than FY15 and FY17 to be better than FY16 from earnings growth viewpoint. It is not difficult to visualise 20 per cent plus growth in FY17 though earnings are likely to expand at slower pace of 10-12 per cent in FY16 Share Market Astrology

What is the rationale behind this?

First, the government spending is picking up. In the first two months, the government’s tax revenues are up about 39 per cent, which increases their ability to spend. More importantly, they are cutting on subsidy that will improve the productivity of spending.

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Second, inventory losses will be a matter of the past and now lower commodity prices would be reflected in lower raw material costs. Third is the tight liquidity which will ease going forward.

We cannot grow if we keep the credit growth at the same level as nominal growth. Hopefully, in the coming years, this will improve and the working capital stress, which is there in balance sheets, will go. The interest rate cycle will also turn down. The policy rate cuts done by the Reserve Bankof India (RBI) will be transmitted to the borrowers expanding the earnings..Nifty Trading Tips

When do you see the RBI cutting rates again and by how much?

There is room for policy rates to come down from current level of 7.25 % to 5.5 % over longer period of time. This path is dependent upon falling trajectory of Inflation which in turn is dependent upon monsoon and supply side debottlenecking. The RBI also has to watch for global factors like US Fed rate hike as debt FII’s are participants in Indian markets.

Banking stocks, especially the public sector ones, have been beaten down badly in the recent market fall. What is your positioning here?

Today PSU banks are facing three problems – lack of talent; lack of capital; and decision making process. Clearly, in the past, the public sector banks’ decision making process has been influenced by non-banking considerations and that has resulted in huge non-performing assets (NPA) baggage. Until the market is convinced that there will be no fresh NPAs and that banks will be able to recover NPAs, I don’t see how PSBs will be able to regain the confidence of investors. We believe private sector banks are well positioned to benefit at this point in time Jackpot Stocks Trading Tips

What has been your investment strategy so far in 2015 and do you see the need to alter it going ahead?

Between large-caps and mid-caps, based on flows and valuations, we think it is time to be overweight on large-caps. Surely, there will be select mid-caps which will do far better than large-caps, but mid-caps as a whole will probably underperform the large-caps. From a sector point of view, we think this is the time to buy companies which have operating and financial leverage.