When money flow, sentiments and fundamentals are alright, the market climbs the wall of worries, says Nilesh Shah, MD, Kotak AMC
From last six months we have argued that this market is due for a correction, valuations are looking slightly stretched and the markets have not obliged. With each passing day, the market valuations are getting richer and they are now trading at levels which we have never seen before. Why are markets not correcting? The market seems Teflon coated!
Markets are driven by three things – money flow, sentiments and fundamentals. In terms of money flow, today in India retail and HNI investors, domestic institutional investors led by mutual funds, insurance companies, pension funds and foreign portfolio investors on an average are buyers. The only seller seems to be the promoters.
In terms of sentiment, the economy is opening up, growth rates are picking up and activity levels are above pre-pandemic level.
And in terms of fundamentals, corporate results have come reasonably strong. Despite the second Covid wave, June quarter results were in line or ahead of investors’ expectations. So when there is a combination of three things, the market climbs the wall of worries.
Do you think it will continue to climb the wall of worry?
Any market is defined by its ups and downs. Will there be corrections? Answer is yes. Will there be a crash? Unlikely to be unless one of the fundamental factors change. Corporate profitability from almost a 10-year decline has now started reversing. In FY21 corporate profitability grew despite GDP de-growth. FY22 is likely to see record corporate profitability growth and FY23 also seems to be on the same expectations. Economy is opening up as active cases have fallen below 2 lakh. The vaccination is likely to cross 100 crore and in terms of money flow with low interest rates prevailing there is money power, money flow coming into the market. So will there be corrections? Answer is undoubtedly yes. Is there likely to be a big crash like March 20? Most probably not.
Two very popular themes are EV and fintech. Are you convinced that these are multi-year themes which one should look into? Could EV and
right now be infra and power of 2008?
On the electric vehicle side, is that the future? The answer is yes. There are compulsions of global warming and climate change, thanks to fossil fuel consumption. A newer technology will come which will help us contain climate changes and electric vehicles will be one technology to achieve that.
Now the second thing comes into play is related to valuation. We have recently seen in one of the large automobile players, private equities took a share at a reasonably good valuation much above the market value ascribed to their EV business. Such events will continue to shape market expectations about valuation.
Unlike the infrastructure theme where leverage and where execution became issues in 2008, in electric vehicles today, there are very few players. Governance seems to be reasonably solid and hence will there be delays, will there be governance related issues? Answer is unlikely to be no. The electric vehicle theme will be a long running theme. Just ensure that you are backing the right player.
IT makes about 8% of your holdings. It is the same as discretionary which is about 8% too. Why 8% for IT? It was the outperformer of last year’s earning season. Kotak recently bought
and look at MindTree’s valuations!
We are not allowed to discuss stocks. We also run arbitrage positions and when we take arbitrage positions, there is no call on the underlying movement. We are buying cash and selling the future. Many times people get confused when we are underweight a stock because I am trying to outperform a benchmark index. I may buy a stock but I am still underweight related to the index. It does not show my conviction.
So never ever visualise a mutual fund based on the trades they have done. There might be many nuances beyond what you are seeing on the surface. You have to evaluate them on the portfolio. They have built on the investment process they have and today I want to make a statement that we are not in those kinds of stocks where floating stock is very limited and valuations can be anything. We are growing at a reasonable price for investors. I am more than happy to sacrifice short-term underperformance because there is no point in buying anything at any valuation or at any price.