While Sensex and Nifty continue record-breaking rallies, investors are wary about a serious stock market correction approaching with the 2019 general elections looming. Both the headline indices have gained over 11% in the last eight months since the beginning of this year 2018. However, gains have been concentrated in select stocks.
Nilesh Shah, Managing Director, Kotak Mahindra AMC stresses that the much-awaited general elections of 2019 are bound to infuse volatility in the stock markets. The ace stock market investment strategist tells investors not to fear and use any major correction to make huge benefits just like any “big sale day” offered by various e-commerce sites.
In an exclusive interview with Porisma P Gogoi of FE Online, Nilesh Shah picks various sectors that might give investors good returns over the course of the year. He recommends lump-sum investments only in specific type of funds. Read on to find out more. Here are the edited excerpts:
The Sensex and Nifty are currently on a winning streak, both scaling new highs almost every day since July. Do you expect any consolidation in the near term or will the uptrend continue? What would be the triggers?
As Benjamin Graham has said –“In the near term, markets are a voting machine but in the long run, it is a weighing machine”. Near-term is more guided by sentiment and liquidity, while longer term returns from an asset class are more dependent on capital allocation, earnings and returns from capital deployed in a particular business.
While domestic liquidity sustains at the current run-rate, foreign liquidity (especially as emerging market have corrected quite significantly and can see potential inflows) might support market in the near-term. Earnings growth by Corporate India is on an improving trajectory after witnessing a sluggish run-rate for the last 3-4 years. And with a key event like General Elections, not very far away, we expect markets to remain range bound.
The recent rally has been quite narrow and only a few stocks have been bolstering the uptrend of the key indices. What is the reason behind it? Should investors be cautious about this particular trend in the stock markets and wait for the gains to be more broad-based?
Market movements this year have been very narrow, with investors concerned on electoral verdict as well as punchy valuations, general trend of market participants have been in risk-off mode. Over the last 3 years, significant monies by investors have moved to cyclical sectors and companies in mid and small cap market. Thus, in a risk-off mode, there has been rotation away from cyclical and smaller companies to more defensive larger companies. This is not the first instance when market performance has been this narrow, nor will this be the last. This is a phase which participants will have to navigate, akin to seeing off a new ball in a seaming pitch in a test match, cautiously for the moment.
Any particular levels that you predict that the Sensex and Nifty 50 might touch this year? What are your predictions on gains in 2018?
Investment into asset class like equities are long-term investment, for longer-term goals. We believe investment in the asset class can give reasonable inflation-adjusted returns in the long-term. However, in the near-term, we expect markets to be range bound. We don’t predict any levels of the market in the near-term at any point of time.
Which sectors can the investors find a bargain in the current market scenario? Given the attractive valuations, is this the right time for investors to jump in with lump sum investments? Are you bullish on some particular sectors?
At this point, value buys are not abundant. Sectors or business which have near-term earnings visibility are richly valued, while those with hazy near-term outlook are avoided.
We expect over the course of the year, corporate banks are likely to emerge out from the NPA mess of the past cycle. Similarly, infrastructure theme has under-performed broader markets over the last 10 years. While infrastructure reforms require strong political leadership, this theme also is likely to emerge as value opportunities subject to electoral outcome.
We are also positive on gas sector, consumer discretionary, cement sectors on relative value construct. We would recommend investors to come via SIP mode into various funds and for lump-sum investments to enter into funds like Balanced Advantaged/Dynamic category.
If we look at the broader markets, we can see a slight recovery in mid-cap and small caps. Do you feel that the correction phase is over? What would your advice to retail investors be?
Mid and small cap investing is more bottom-up and therefore cannot be generalised. Having said that, we believe risk-reward is better to be in larger mid and small-cap companies (say, greater than Rs 5,000 crore market cap) than the smaller companies at this point of time.
What is your long-term view of the domestic equity markets? What does the 2019 general election have in store? Do we expect more volatility?
Every election has been a source of uncertainty for markets and 2019 is no different from that perspective. Ultimately, investor wealth is invested into companies that have to profitably grow above their cost of capital and as long as that continues, long-term attractiveness of the asset class is maintained. Recent reforms like bankruptcy reforms, Make in India, GST, formalisation are mammoth initiatives that will pave the future for businesses in a rule-based economy that will further improve the potential for many good businesses. So in this context, we are positive on longer-term prospects of Indian equities.
Having said that, the uncertainty of elections will induce higher volatility in markets in near-term, which can’t be wished away. However, one must use volatility to their advantage rather than fear it. Just like sale-day by various ecommerce sites see significant buying on those days, we would advise investors to benefit from any serious corrections in the market, which provide attractive prices for long-term portfolios.