The India investor has an edge over global investors, because the Indian markets are more driven by domestic happenings rather than global events, believes Nilesh Shah of Prudential ICICI MF.
Nilesh Shah of Prudential ICICI believes the India investor has an edge over global investors, because the Indian markets are more driven by domestic happenings rather than global events. In his own words, "Global influence has a limiting role, it is the domestic fundamentals that will drive the fundamentals over a longer period of time for the Indian market."
Shah also says the markets need to consolidate, because volatility will increase the risk premium, which is not good for the long-term health of the market.
"Hence we expect some sort of consolidation to emerge; shares shifting from weak hands to strong hands and then markets stabilising in line with the fundamentals," he says.
Excerpts from CNBC - TV18’s exclusive interview with Nilesh Shah:
Shah also says the markets need to consolidate, because volatility will increase the risk premium, which is not good for the long-term health of the market.
"Hence we expect some sort of consolidation to emerge; shares shifting from weak hands to strong hands and then markets stabilising in line with the fundamentals," he says.
Excerpts from CNBC - TV18’s exclusive interview with Nilesh Shah:
It is a big relief because one believed in India story and it was painful to see that 100-200 shares volume could kill prices like this. People who wanted to buy quantities, the lots were not being offered. So when the prices have recovered, one feels happy that at least now the market is listening to fundamentals and not just being driven by stray selling here and there.
Valuations are fair at around 10,000 levels. We will be roughly around 15 times forward earnings and critical component in that earning is essentially the monsoon.
If the monsoon comes within the range that is expected by the Met department, then there will be reasonably fair valuations. Post every correction that happens in the market, people become smarter and then the markets tend to behave in a fundamental way.
So we are now seeing that the markets need to consolidate, rather than give this kind of a huge volatile movement. Volatility will increase the risk premium, which is not good for the long-term health of the market.
Hence we expect some sort of consolidation to emerge; shares shifting from weak hands to strong hands and then markets stabilising in line with the fundamentals. And when one is ready to discount March 2008 earnings, the upturn in the market should begin.
If the monsoon comes within the range that is expected by the Met department, then there will be reasonably fair valuations. Post every correction that happens in the market, people become smarter and then the markets tend to behave in a fundamental way.
So we are now seeing that the markets need to consolidate, rather than give this kind of a huge volatile movement. Volatility will increase the risk premium, which is not good for the long-term health of the market.
Hence we expect some sort of consolidation to emerge; shares shifting from weak hands to strong hands and then markets stabilising in line with the fundamentals. And when one is ready to discount March 2008 earnings, the upturn in the market should begin.
Few things are very critical. One is that weak hands have to exit the market. This kind of a panic movement on the way down or on the way up is more from the investors and traders, who are acting under duress and panic rather than fundamentals.
The second thing is the monsoon. If the monsoon is good, then that is positive for the market and vice versa.
The third thing that is happening is the IPO supply. A lot of IPOs have been postponed because of the volatility in the market. But suddenly, if all of them hit the market, then the market cannot stabilize. In fact, it will have to correct by a significant number if all of that supply emerges.
What we need to see is a reasonable valuation in the IPOs, a reasonable monsoon and some sort of reduction in volatility because stronger hands would then like to stabilise the market. It is going to be fairly volatile in the short term. Hopefully, in the next 15-20 days, volatility should start subsiding a little bit.
The second thing is the monsoon. If the monsoon is good, then that is positive for the market and vice versa.
The third thing that is happening is the IPO supply. A lot of IPOs have been postponed because of the volatility in the market. But suddenly, if all of them hit the market, then the market cannot stabilize. In fact, it will have to correct by a significant number if all of that supply emerges.
What we need to see is a reasonable valuation in the IPOs, a reasonable monsoon and some sort of reduction in volatility because stronger hands would then like to stabilise the market. It is going to be fairly volatile in the short term. Hopefully, in the next 15-20 days, volatility should start subsiding a little bit.
That is the beauty as well as the limitation of the Indian market. Today, when you meet a common investor, his question is not about the index or the stock, but about what will happen on the Fed on June 29.
An average investor has become aware of what is happening in Fed. To some extent, India is a part of the global market and it should be influenced by the global events. But at the end of the day, it is far more local and dependent on local happenings. It does not have a very high export-import to GDP ratio, instead corporate factors are depended more on the local factors than the global factors.
As long as the growth is good, the IIP numbers are positive, two wheeler- four wheeler numbers are positive, cement sales, petrol and diesel and steel consumption's going up, the markets will be driven more by domestic factors rather than the global events.
Of course, if the Japanese Central Bank raises interest rates, it will have some impact. But it cannot have a material long-term impact. When people talk about market collapsing because the US Fed rate is expected to move from 5% to 5 1/4%, they forget that when Fed moved from 1% to 5%, the markets also moved from 4000 to 9000 and even 10,000.
So global influence has a limiting role, it is the domestic fundamentals that will drive the fundamentals over a longer period of time. That is where Indian investors have an edge over the global investors. Let them react under global conditions, we should take advantage of our home knowledge
An average investor has become aware of what is happening in Fed. To some extent, India is a part of the global market and it should be influenced by the global events. But at the end of the day, it is far more local and dependent on local happenings. It does not have a very high export-import to GDP ratio, instead corporate factors are depended more on the local factors than the global factors.
As long as the growth is good, the IIP numbers are positive, two wheeler- four wheeler numbers are positive, cement sales, petrol and diesel and steel consumption's going up, the markets will be driven more by domestic factors rather than the global events.
Of course, if the Japanese Central Bank raises interest rates, it will have some impact. But it cannot have a material long-term impact. When people talk about market collapsing because the US Fed rate is expected to move from 5% to 5 1/4%, they forget that when Fed moved from 1% to 5%, the markets also moved from 4000 to 9000 and even 10,000.
So global influence has a limiting role, it is the domestic fundamentals that will drive the fundamentals over a longer period of time. That is where Indian investors have an edge over the global investors. Let them react under global conditions, we should take advantage of our home knowledge
It is a mixed picture. A lot of investors have shown tremendous maturity and when the NAVs were dipping, they didn’t bother too much about it. They said that they understood this is market volatility and hopefully it will recover based on the crude story.
Fortunately, we never had any leverage investors in mutual funds into the market. So though the NAVs have dipped, they have been able to bear the pain.
Our suspicion is that if the market goes up higher like it has gone in last two days, then probably one can get the comfort that India story is there for real and they will not redeem. However, if the volatility keeps on increasing significantly, around 500 points up one day or down another day, then that may induce them to trim a little bit of their holdings.
However, one thing that we expect is that at higher levels, the flow of subscriptions could be little lower and at lower levels, there could be a fairly higher amount of money based on the maturity, which our clients have shown.
So if the market consolidates, there will be subscriptions and if market goes up significantly higher, probably there may not be much of redemption.
Fortunately, we never had any leverage investors in mutual funds into the market. So though the NAVs have dipped, they have been able to bear the pain.
Our suspicion is that if the market goes up higher like it has gone in last two days, then probably one can get the comfort that India story is there for real and they will not redeem. However, if the volatility keeps on increasing significantly, around 500 points up one day or down another day, then that may induce them to trim a little bit of their holdings.
However, one thing that we expect is that at higher levels, the flow of subscriptions could be little lower and at lower levels, there could be a fairly higher amount of money based on the maturity, which our clients have shown.
So if the market consolidates, there will be subscriptions and if market goes up significantly higher, probably there may not be much of redemption.
I expect reduced volatility. I also expect some amount of sanity, where the market trades in the fundamental range and does not go beyond it.
Fortunately, we had increased some cash allocation in midcap funds. But we never faced much redemption, though the NAVs have suffered maximum over there. This was because of the huge drop in the prices at lower volumes and that is the reality of midcap funds. When one wants to accumulate midcap stocks, one has to pay a good price to enter and even a small amount of selling can bring those prices significantly down.
So midcap is a high-risk-high-return fund and we have to manage it within that limitation. We certainly think that in today’s point of time, a lot of midcaps offer huge value. They all are available at 8 to 10 times forward earnings.
Maybe its time to embrace risk in the midcaps, even on a week-on-week basis, when the largecaps have recovered; midcaps haven’t recovered. If one goes by the 9/11 experience, where the largecaps started moving first and then the midcaps, over a period of time midcaps outperformed largecaps by significant margin.
So based on the 9/11 experience and the valuation, we think midcaps probably will under perform largecaps for sometime, but when the momentum is back and the valuations are factored into the purchase decision, midcaps will outperform largecaps. That is where midcaps investors will also benefit.
So midcap is a high-risk-high-return fund and we have to manage it within that limitation. We certainly think that in today’s point of time, a lot of midcaps offer huge value. They all are available at 8 to 10 times forward earnings.
Maybe its time to embrace risk in the midcaps, even on a week-on-week basis, when the largecaps have recovered; midcaps haven’t recovered. If one goes by the 9/11 experience, where the largecaps started moving first and then the midcaps, over a period of time midcaps outperformed largecaps by significant margin.
So based on the 9/11 experience and the valuation, we think midcaps probably will under perform largecaps for sometime, but when the momentum is back and the valuations are factored into the purchase decision, midcaps will outperform largecaps. That is where midcaps investors will also benefit.
Certainly not. That report was prepared three-four days back, just to give the assurance to the investors that the volatility is there. Liquidation has happened, but we are not like in the 2000 event, where valuations in business models were questionable. We have moved from 19 times forward earnings to 14 times forward earnings. It is not in a journey of 100 times forward earning to 14 times forward earnings.
Second, there is no question about the business models of companies in which we have invested this time. There is not even a single stock on which people can raise a finger and say that look, this company did not exist at all or this company’s promoter was a complete fraud, like it was the case in 2000.
So this time, we have probably gone a little bit wrong on valuations in the short-term, but certainly not on the businesses. So this was more of a handholding exercise where the investor says that look this is not 1999-2000 or 1991-1992 or 1995-1996, where one would lose 50-60-80% of one's money. This is certainly a bounce back and the last two days' events have given us the comfort that we were right.
Second, there is no question about the business models of companies in which we have invested this time. There is not even a single stock on which people can raise a finger and say that look, this company did not exist at all or this company’s promoter was a complete fraud, like it was the case in 2000.
So this time, we have probably gone a little bit wrong on valuations in the short-term, but certainly not on the businesses. So this was more of a handholding exercise where the investor says that look this is not 1999-2000 or 1991-1992 or 1995-1996, where one would lose 50-60-80% of one's money. This is certainly a bounce back and the last two days' events have given us the comfort that we were right.
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