Investors must moderate return expectations, stick to asset allocation: Nilesh Shah

"We remain bullish on consumer discretionary because ek lakh crore ka tax rebate has come into play and that is recurring every. Thereafter, there is EMI burden reduction, thanks to 1% interest rate reduction, and finally somewhere towards 2027 beginning we should see 8th pay commission coming into play putting money in the pockets of central government employees," says Nilesh Shah, MD, Kotak AMC.

You were bullish on it when we spoke a couple of months ago. You were bullish on cement. You were bullish on FMCG. Are those calls still intact? Those are contra calls, but are they still at play?
Nilesh Shah: So, in IT we are more bullish midcap IT companies where we believe they are leveraging AI in a faster manner and providing cheaper and better solutions to their customers. In FMCG, we are more towards consumer discretionary rather than consumer staple. Roti, kapada, makaan ab sab logo ne achieve kar liya hai, the focuses more on healthcare, on travel, tourism, hotel, QSR those kind of things.

We remain bullish on consumer discretionary because ek lakh crore ka tax rebate has come into play and that is recurring every. Thereafter, there is EMI burden reduction, thanks to 1% interest rate reduction, and finally somewhere towards 2027 beginning we should see 8th pay commission coming into play putting money in the pockets of central government employees.

Put together this money in the pockets of consumers should result into consumer discretionary space moving more than the expectation. So, we continue to remain bullish selectively on sectors like midcap IT, consumer discretionary, banking and financial services, chemicals.

Two phenomena which are playing out in the market. A) there has been a flurry of IPOs, I mean as of last week itself you had just over 20 IPOs both mainboard as well as SMEs. The kind of valuations A) that they are coming at and then B) the other trend in the market this promoter block deal and offloading of stake which is happening and sometimes at a steep discount as well to the market valuations. What is it that you are making of that?
Nilesh Shah: So, one, we are thankful to promoters and IPO companies because they are providing supply. If they did not provide supply, we do not know whether we will be in a position to buy the market or not. Second, again, in the IPOs one has to be very-very selective. Just because an IPO of a company is coming, you do not go and invest over there. If there is a better version of that available in secondary market, why will you go into IPO? So, be very-very selective in IPO and now fortunately you have large number of IPOs coming. Not all of them are going to be successful. Not all of them are going to be value creator for their shareholders. Undoubtedly, as mutual fund, we are approached by every single IPO company.

We have to put our resources and we will have to work hard to pick up the right company. In terms of, the promoter selling, OFS, at a sharp discount, well that is the market. Neither we do favour to promoter nor they do favour to us. We have to come at a price which is fair in our opinion for a transaction to occur. Many promoters are undoubtedly divesting in the market looking at their valuation, but a large part of that is coming back into the market via PMS, AIF, mutual fund, family office, direct investment. So, in some sense when you are looking at one side of equation, do keep in mind that there is a second side of equation also in play over here.

Let us look at two differentiating factors. The differentiating factor by between last quarter and this quarter is, we have had good monsoons so far. Monsoons come early. The rainfall distribution has been great. Second is abundant liquidity. In fact, liquidity is now surplus. These are two factors which were not at play in the last quarter. Now they are at play in the month of June. When will the impact of this be visible in earnings?
Nilesh Shah: So, monsoon while it is plenty, it is unlikely to come into play before December 25 quarter. July will be the month whose rain in terms of distributions, spatial distribution, as well as quantum will be very-very critical. By the time kharif crop comes into play, it should be September to December impact, festival season, and kharif season output coming together. In terms of liquidity, while RBI is playing on the front foot in terms of providing liquidity and they have inserted more than 10 lakh core worth of liquidity in one form or other, the credit growth has remained in high single digit. It is not even in double digit. So, liquidity is like water in the dam, that is very good. It gives confidence. But ultimately water should flow into the tap. The pipe should be clear. And as long as we do not see credit growth picking up, as long as we do not see investment cycle picking up, the benefits of liquidity may not be as visible on the economy as one would like. But do remember it is always important to have water in the dam and hope that it will flow into the tap rather than not having any water in the dam.

If I have to ask you that what should be the ideal investor strategy at this point in time given that the markets are very close to their all-time high levels. Nifty Bank is trading at an all-time high level as well. What should be the ideal portfolio be like given the fact that for the markets the earning expectations are on the positive side. We are living in uncertain geopolitical environment and very select sectors are giving you that valuation and growth comfort. What will be your advice to the investors?
Nilesh Shah: The first and foremost will recommend investor is to moderate return expectation. Last five years returns are unlikely to be repeated in next two to three years. Markets are fairly valued or little bit over fairly valued and rerating of market is unlikely to happen which means your return from the market will be linked with the earnings growth and earnings growth in our opinion is likely to be in high single digit, low double digit. So, first and foremost, please moderate your return expectation. Number two, outside of equity, there are asset classes, reit, invit, debt, mutual funds, performing credit, AIFs, precious metal, index, or ETF. Clearly, you need to diversify. Please maintain your asset allocation across debt, equity, commodity, and real estate. Do not put everything in equity because last five years equity has delivered great return. So, follow the dharma of asset allocation and moderate your return expectation, that will be our recommendation to investors.

But if you had to really stick your neck out, on which of these asset classes is going to be the best performer for the year ahead, which one is it going to be you think?
Nilesh Shah: So, it is always difficult to take a short-term call on a one-year basis. But let me say that the expected return from all these asset classes over next one year is likely to be in a very-very narrow range. It is not going to be one is on the X side and other is on the Y side. The gap will be very-very narrow and hence maintaining asset allocation becomes very-very critical.