Have the markets bottomed out? Nilesh Shah, managing director at Kotak Mahindra Asset Management Company says its a fair value market, stocks are close to historical averages but selling may continue till FIIs resume buying. He sees Nifty earnings between Rs 1,150 -1,200 per share in FY26 and says India can be a beneficiary of global growth if we play our cards well.
Here is an excerpt of an exclusive conversation with FinancialExpress.com –
Do you think the Indian markets have bottomed out at the current level?
Over the short-term, the market is like a voting machine, the vote comes, the money flow comes. But over the long-term, the market is like a weighing machine, the fundamentals begin to matter. As you can see, at the moment, flow-wise FPIs are on the selling side. They are not hiding their bias, they are selling. Once you know someone is selling, why will you give them an easy exit. You will buy but at lower prices.
Therefore, at least in the near-term, it might be fair to say as long as FPIs continue to sell, the prices will continue to go down. Whenever their selling stops, the markets will bottom up. When they resume buying, markets will start moving up.
Is the correction in the mid and small caps done or do you anticipate more pain in that segment?
You have to understand that within the small and midcap segment, there are momentum stocks and there are quality stocks. Momentum stocks have seen a substantial fall. However, there is more pain left in these momentum small, mid, micro mini caps.
In comparison, the quality small and mid caps, we believe, are bottoming out. When I say bottoming out please remember that if FPIs are continuously selling, prices will go down. But from a valuation point of view, at least the quality large mid and smallcaps are now around their historical averages.
It’s a fair value market. It has not become a cheap market like March 2020 Covid-19. We are around our historical averages in most of the large mid and small caps.
What’s the right investment approach at the moment?
There is no way one can predict the market.We think this is a fair value market. Hence your allocation to equity should be equal weight or neutral to your risk profile and investment objective.The large caps at the moment look below historical averages. Small and midcaps are trading around historical averages.
So, you should be investing more in large caps. You should be overweight there. And you should wait for some more correction in small and midcap before you become equal weight. Please keep some cash to buy during corrections. And if the market continues to go down and become cheaper, you can keep on increasing your allocation and become overweight equity. Don’t put all your money in one go. Clearly there is a lot of uncertainty – From geopolitics to Trump policies on tariff to rupee to FPI selling to local earnings. Therefore, try to invest on a piece-meal basis.
What sectors, according to you, offer attractive valuations at the moment?
We are investing mainly on a bottom-up basis in banking and financial services where we believe valuations are reasonable. We are investing in the consumer discretionary space where tax rebates have put money in the pockets of consumers. Then there is the 8th Pay Commission coming which will put money in the pockets of government employees. Overall, we believe consumer discretionary and banking and financial services will be good sectors to invest from a medium-term point of view.
Conversely, what are the sectors that are still Avoid, with relatively more expensive valuation?
We have been saying for some time that we should avoid low floating stock counters. These are dangerous in terms of valuation and we’ve exercised a lot of caution. They have fallen more than our mutual funds. But we still think there is room for them to go down further. So avoid low floating stock counters where valuations are still expensive relative to the broader market.
Another sector where one needs to exercise caution is BPO. We believe artificial intelligence will take away BPO business. So stay out of that segment.
Third, some of the financial services companies are exposed to unsecured lending, personal unsecured lending, microfinance. They may still have some more downside.
The government’s infrastructure focus is shifting from road to water, railway renewable energy. So to that extent you have to price-in some amount of risk on the construction companies’ side. The real estate cycle seems to be turning around, be very, very careful.
When do you expect FIIs to begin buying in India?
We expect FPIs to continue to sell for some more time. I think we are at the fag-end of rupee movement for the time being. Our valuations have adjusted, large caps are below historical, average, small and mid caps are at some premium. Trump’s ‘make America great again’ story is playing out and there are concerns being raised about the US recession. Their valuations have gone up, prices have moved up, discounting tax cuts. As a result, emerging markets relative to developed markets have become attractive. Therefore, all the triggers which pushed FPIs to sell, have reduced to some extent.
FPIs have become underweight India compared to our weight in benchmark index. As we progress through the year, IPOs like NSE come through, there will be an increase in our weightage in MSCI emerging market index. And most importantly our own earnings growth and governance will come back to focus.
We think India has potential to reach double digit earnings growth next year compared to high single digit growth this year.So at some point of time, underweight position of FPI, our valuation and earnings growth and return on equity, and our governance process put together could bring FPIs back to investing in India. Even today, on a longer term basis, India remains an exciting growth scope.
What’s your view on the rupee, is it poised for further weakness?
The rupee movement will be driven by what happens in China. During PresidentTrump’s first term, when he imposed a 20% tariff on China, the currency gave way by 13%. Quite likely China may play the same game.If that happens, then India rupee has to depreciate in tandem. Our largest trade partner is China. We compete with China in many items. And they don’t play fair. They are way ahead of us. So I have no option but to keep my currency competitive with China.
So, rupee movement in the near-term, in the medium term, in the long term will be determined based on how Chinese currency moves.
Do you expect India to benefit from the global realignment of allocation as slowdown fears emerge in the US again?
India will be a beneficiary of global growth if you can convert “anything but China” to “always India” move. I don’t think we have done a great job in that aspect but ‘Lage raho Munna Bhai,’ if you keep on trying and keep making progress, some day it will work. So, we will be the beneficiary of global growth provided we play our cards well. We have made a beginning, but we need to improve our game.
Q4 earnings are likely to be announced in 3 weeks, do you see scope for any big surprises, what are your expectations for FY26
We have been getting about Rs 250 rupee earnings per share every quarter for Nifty 50. The fourth quarter is generally better than the first three quarters because of the festival season boost, etc. I think Nifty earnings should be somewhere around Rs 262 -275 per share in Q4.
Next year’s earnings growth could take that EPS of Nifty 50 from Rs 1,030 to somewhere around between Rs 1,150 -1,200 per share. Rs 1,200 per share looks a little out of reach. We will really require some divine intervention. But Rs 1,150 per share looks easily achievable. So, we move from high single-digit earnings growth to low double-digit earnings growth for FY26. We should be anywhere between 1,150 to 1,200.
What’s your assessment of India’s growth trajectory and prospects of a rate cut going forward?
We are at a stage where there is a need to provide growth support. And growth support requires liquidity as well as rate cuts. RBI has been fairly aggressive on infusing liquidity. So, liquidity wise, we believe RBI will continue to provide liquidity. On the rate cut side, RBI will have to carefully wait because the US Fed, thanks to policy uncertainty and tariff, is likely to keep rate rate cuts back-ended. They made three rate cuts last year but who knows, the opening salvo in this year may be deferred. So, that puts some limitation on how much RBI can cut.
Either way, whether they cut rate or not, the combination of liquidity and confident commentary will ensure that the interest remains subdued. In terms of growth, India will be a mid-single-digit GDP growth country. If global growth is favorable to us, monsoon is good, we’ll grow it 7%. If global growth is bad, monsoon fades, we’ll grow it 5%. To take it to double-digit, India needs to take hard decisions. And unfortunately, our ecosystem does not support taking tough decisions.