Nilesh Shah, managing director of Kotak Mahindra Asset Management Company, is one of the few asset managers who believes that fund management is more about common sense than fancy degrees or qualifications.
A gold-medalist chartered accountant and a rank holding cost accountant, Shah began his association with stock markets during his articles in 1989. In an email interview with PRASHANT MUKHERJEE, Shah said markets have an uncanny sense of pricing during key events like elections and he expects heightened volatility in the markets over the next 6-9 months. Excerpts:
Q: Exactly a year ago, nobody favoured debt. Now, do you think the asset allocation for FY19 needs to be changed to a mix of debt and equity?
A: Debt or equity, both are a necessary part of the allocation strategy. You can adjust the allocation ratio. But if you remove one entirely ~ then the risk becomes slightly unjustified. We were optimistic about debt even then (but not necessarily on duration).
We were encouraging investment in credit and short-term debt funds. In fact, we also urged investors to allocate the duration funds opportunistically and by means of STP/SIP. So, as an investor, please do not change your allocation strategy according to the whims of market winds but as per your need, time horizon and risk appetite.
Q: There are reports stating that nearly 23,000 dollar-millionaires have left the country since 2014, with 7,000 leaving in 2017 alone, taking India to the top of the exodus charts. Do you worry about those numbers, since Indian markets are mostly driven by so-called ‘hot money’?
A: Hot money is usually speculative international financial flows trying to capture some momentum or arbitrage. India with its strict capital regulations and stringent capital account convertibility does not need to worry much on that account.
The Indian equities market is now increasingly getting driven by domestic inflows, especially by mutual fund investments. Having said that, one needs to always be watchful of capital leaving a country.
What India should be concerned about is whether it is guaranteeing property rights; and producing opportunities and rule-based order in copious quantities. Till the time we can produce it, entrepreneurs will be creating wealth for themselves and others.
This exodus is a problem if growth opportunities are rare, the entrepreneur is frustrated, and life and property rights are secondary to political exigencies. But that I believe is not happening in India. So, we are fine.
Q: There have been growing concerns in India over economic slowdown. So, what is your diagnosis and prescription to address this situation?
A: The slowdown did happen post-demonetisation and GST roll-out but growth is picking up, and momentum is picking up in quite a few parts of the economy. Our concern should be now to bring it to double digit level and make it sustainable. A lot of work needs to be done to achieve that.
India is a heterogeneous country ~ there are some states with population as large as Brazil and a few states having the population of Estonia; and then there are some states with per capita incomes similar to Nepal and Indonesia. India truly is a continent and therefore there is no single switch or set of reforms that will change our destiny instantly.
We are currently in the midst of significant reforms in many areas of the economy. In many cases like the bankruptcy code, we are attempting a complete reboot of the banking system, but we also need to be careful that we continue to nurture animal spirits of entrepreneurs. So, a fine balance is required, both in terms of policy drafting and execution.
Q: What is your assessment of the country’s economy and the staggering levels of bank NPAs? Are you satisfied with the actions taken by the government on NPAs? Do you support the idea of dragging major defaulting companies to the NCLT?
A: NPAs are partially a result of misallocation of capital, partially due to structural economic cycles and partially due to corporate governance issues. We are currently facing an amalgamation of all the three factors.
This has amplified the mess in the present cycle. Usually the NPAs are borne by the equity investors of the banks, but in case of PSU banks, the NPAs, due to government ownership, have a fiscal impact also.
I think the government is showing a right mix of resolve and adeptness in finding a solution to the NPA problem. Bankruptcy code is truly a pathbreaking reform which will change the mindset of borrowers in the long-term.
Like any other new reform, the mechanisms chalked out are relatively untested and will have initial hiccups. Pragmatic changes to regulation will happen as the first few large cases go through this process and hopefully set a strong template for future resolutions.
Q: The announcement of demonetisation was a surprise to everyone. What was your first reaction? The mutual fund industry is one of the biggest beneficiaries of the move as flow of household savings to mutual funds grew substantially.
A: All unanticipated policy announcements cause volatility in the market and demonetisation was no different. Our initial reaction was to aggregate our thinking heads and devise the scenarios and the strategies needed to minimise our investors’ risks, while also being mindful of the long-term opportunities.
Q: Do you think the increase of domestic flows will continue even when the markets turn volatile and trend downwards?
A: The inflows in mutual funds are an accumulation of investor awareness programmes by mutual fund industry participants, the distributors and AMFI. So, while the volatility may dent some inflow trends momentarily, the investor base is largely going to expand and domestic inflows to Indian equities will remain more or less intact going forward.
Q: Does one deploy more to balance funds or do they risk it out and invest more in small caps because they are the ones which have corrected more?
A: Like I said earlier, investments should be in accordance with your individual objectives and plans unique to your requirements. There is scope for opportunistic investment allocation but that should not form a major part of your investment component. Having said that the risk profile of a balance fund investor is different from that of small cap investors and therefore cannot be compared.
Q: What are the sectors you think will outperform the benchmark index in the next 3-4 years time and are good categories for investment?
A: Kenneth Galbraith had once quipped that forecasting makes astrology look respectable. The world is too dynamic and too much in flux to hazard that. Having said that, auto, capital goods, cement, banks, oil and gas are the sectors we are looking at keenly.
Q: With the general elections scheduled to be held in May 2019, how do you think that the market will play out the big event in two different scenarios?
A: Benjamin Graham eloquently put it – “In the short run, the market is a voting machine, but in the long run, it is a weighing machine”. Markets have an uncanny sense on pricing in key events like elections ahead of the event itself, and to that extent, I do expect heightened volatility in markets over the next 6-9 months.
While near-term sentiment does bring in volatility, in the long run, fundamentals of the business take over. Our fundamentals as a nation are extremely robust ~ with a young population, strong domestic consumption-based economy, rising per capita incomes and improving spends on infrastructure. Thus, I remain optimistic on any scenario in our long-term journey of wealth creation.