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Second half to be better than H1; bullish on rural, not urban India; premiumisation, not mass market: Nilesh Shah

Nilesh Shah, MD of Kotak AMC, analyzes market trends, suggesting a focus on stock picking and sector rotation. He advises moderate return expectations, favoring fixed income, gold, and silver for long-term investments. Shah notes subdued first-half economic indicators but anticipates improvement due to festive spending, weddings, and increased government spending.Nilesh Shah, MD, Kotak AMC, says there are still low floating stock counters in railways, defence, capital goods, and infrastructure, where valuations are ahead of fundamentals. Private banks are trading below historical averages. Auto, cement, telecom, pharma, and IT are trading around historical averages. This is the market where stock picking and sector rotation will become key and where quality will outperform momentum. There are reasonable valuation sector stocks which will outperform expensive valuation stocks and sectors. High floating stock market discovered prices will deliver better return than low floating stock counters. We are in a consolidation mode. There were two days of a pretty ferocious rally despite the fact that FIIs have remained net sellers. What is your view on the market trajectory? Does the undertone remain positive or is it going to be a very flattish market at hand? Nilesh Shah: It all depends on how you see things. For me, when markets are correcting, I find it exciting because I will be able to buy at a cheaper price. Now, to many people a correcting market will be bad because they will count losses on their portfolio. So, the most important thing is the mindset, is correction an opportunity or is correction a notional loss which you will convert into real loss through a mindset. On Friday and Monday, we have seen a good bounce back, but obviously markets cannot bounce back like that forever. If that would have happened, markets would have been much higher. The ups and downs are part of the market and we are in a phase where PE expansion looks difficult. Earnings growth will drive the market and we have been saying for some time, please moderate your return expectations, gone are the days when small and midcaps will deliver 30% return per annum for three-four years in a row, that is unlikely to happen. So, what should one do now? Start looking at moving back to fixed income because in fixed income at least 8-9% return could come unlike what is expected from equity markets in the next 12 to 18 months? Nilesh Shah: Again, you have to follow your asset allocation. We have been saying for some time that duration is a good play and play it with a 12-18-month horizon, and not with a three-six months' horizon because in a structurally declining interest rate market, there will be ups and downs. Now, the Fed itself is looking at the shallow interest rate cut cycle based on what we have heard in the market and what Fed futures are predicting. If the Fed futures are right, then Fed interest rate cuts also will be shallow and obviously there will have an impact on Indian interest rates. My recommendation, this is the time to follow, like as always, your asset allocation. In fixed income, go for duration but with a 12-18-month view, not a three to six months view. On gold and silver, we remain bullish, but again, with a three-year view, not a three-month view and on equity, use every dip as an opportunity to buy. Our long-term fundamental growth story remains intact, but moderate your return expectations. What you saw in the last five years is unlikely to be repeated in the next five years. This entire earning versus valuation matrix was not very favourable till October, and now correction has kicked in. It is 10% on an average, it is 20% on an average for midcap, 30% on an average for smallcap stocks. Is that matrix now looking appealing? Nilesh Shah: Again, in the market, whatever one says, the opposite is also true. We believe there are still low floating stock counters in railways, defence, capital goods, infrastructure, where we believe valuations are ahead of fundamentals. On the other end, private banks are trading below historical averages. Auto, cement, telecom, pharma, IT are just trading around historical averages. This is the market where stock picking and sector rotation will become key. This is the market where quality will outperform momentum, reasonable valuation sectors and stocks will outperform expensive valuation stocks and sectors and high floating stock market discovered prices will deliver better return than low floating stock counters. There is a lot of debate on where the government spending will move and when will the consumer demand revive? If one has to bet on a recovery, is it better to bet on revival of consumer demand or it is better to not bet on consumer demand but rather bet on revival in government spending? What is a better theme for the market? Nilesh Shah: So, if we see the first half, especially July, August, September did witness some subdued numbers. Cement consumption was soft, diesel and petrol were soft, GST collection was growing below nominal GDP growth, but a large part of that could be attributable to monsoon shradh period and government capex remaining low especially from April to July because of election. Now, if we look at festival season, it has begun reasonably well. Apparel sales were in double digits. The festival season passenger vehicle and two-wheeler sales were either in high single digit or low double digit. In two-wheelers post festival demand is better than during festival period. So, my feeling is that festival season has given a boost to consumption. Now, we are witnessing the wedding season, about 48 to 50 lakh weddings, spending of about five-and-a-half lakh crore to six lakh crore, that should also support the economy and consumption. More importantly, government spending, which averaged about Rs 69,000 crore a month in the first half, if it has to achieve a budgeted target of Rs 11,11,111 crore, then it needs to pick up and reach 1,16,000 crore. I believe there are some of the contractors who have not been paid money. If those monies are released, then certainly that will boost capex also. My feeling is that the second half will be better than the first half in terms of growth, thanks to festival season pickup, wedding and government capex if it reaches the budgeted target. Put all these things together, you can pick up in consumption as well as investment in some of the bets. In consumption, we are more bullish consumer staples than consumer durables. We are more bullish in rural India rather than urban India. And we are still bullish on premiumisation rather than mass market. On the capex side, the focus of the government is on road, water, defence. Here, you will have to be very selective about picking up counters because there are some counters where floating stock is limited and hence valuations are ahead of fundamentals. Those businesses will do well, but the investor's expectation at this point of time is so high that it might be difficult to meet.

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