In the past year, the Indian markets performed better than global peers. What was interesting during the year is that retail investors were smart enough to book profits when the stock markets hit new highs, but continued with their systematic investing plans (SIPs). Nilesh Shah, MD, Kotak Mutual Fund, tells Joydeep Ghosh that domestic cyclicals and companies that are focusing on the Indian markets are likely to outperform in the coming year. Excerpts:
The mutual fund industry’s inflows have seen an interesting trend. While monthly SIPs are at an all-time high, net inflows into equities saw a sharp dip due to profit booking. How do you interpret the situation?
Investors and distributors have shown tremendous maturity over the last few years. All the efforts of the mutual fund industry over the last two decades in spreading financial education has borne fruit. By and large, in a rising/expensive market, investors book profit. The flows are SIP flows minus redemptions due to profit booking. In a falling/cheap market, flows are SIP flows plus subscriptions. My guess is that this trend is likely to continue in the future where cheaper markets will attract more flows.
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In 2022, when global stock markets were badly hit, Indian markets did much better. What are the reasons behind this?
Our economy is doing better than the global economy. We are the fastest-growing major economy in the world. Six out of top 10 fastest-growing cities in the world are in India. Four out of top 10 cities where maximum construction activity is seen are in India. In terms of GDP, states like Maharashtra is now as big as India was in 2005. This economic strength is reflected in the performance of the India Inc. Markets are following the economy and India Inc’s performance. Some part of the performance is also due to the valuation premium India is enjoying over its peer group. Our earnings growth, governance standards and commitment to environmental issues have created a valuation premium for India over its group.
How do you see the markets going forward in 2023? Will the same trend continue or we will see some correction?
In CY22, returns from debt and equity funds were similar in quantum. We expect a similar trend to continue in CY23. The Indian economy has done well to withstand global upheaval. India Inc has turned in good performance despite the Covid crisis and global shocks like the rise in energy prices. Results in the September 2022 quarter were little below expectations.
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CY23 will be driven by how events like Russia-Ukraine war, US Fed’s management of growth and inflation, earnings outlook and others play out. If the events turn in our favour, markets can do well. It will be important to invest with a long-term outlook.
Which are the sectors that will be able to withstand the global meltdown better?
Domestic cyclicals will be able to withstand the meltdown better. Companies focused on domestic markets will be a better bet.
What is your advice to stock investors? Is it time to do value picking or momentum stocks or just keep it simple in, say, large caps?
Investors should invest with a long-term outlook and follow an asset allocation discipline. Don’t forget debt opportunities, too. There is not much to choose from small-, mid- and large-caps from a valuation point of view. One should be marginally overweight on large-cap and marginally underweight in small- and mid-caps within neutral equity allocation.
When do you think the rate hike cycle coming to an end in India and globally?
The market expectation is that this time around, the US Federal Reserve will be done with interest rate hike cycle by first half of CY23 and begin rate cut cycle by the end of CY23. Indian rate cycle is likely to follow the same path. Our inflation is lower than the US Inflation for more than a year. This does provide some elbow room to the RBI to manage the interest rate cycle. Despite the hawkish stance of the US Fed, the overall debt-to-GDP ratio and elevated deficit will ensure that the US can’t keep rates higher for longer.