rewrite this title and make it good for SEOBroad-based market rally unlikely without FPI flows & stronger growth: Nilesh Shah

“Clearly in defence, companies which are catering to local as well as global market, which is futuristic in terms of their product profile and which has capacity to deliver to local as well as global market should do well,” says Nilesh Shah, MD, Kotak AMC.I wanted to understand about these narrative stocks, because given the fact that you have seen a lot of correction actually creep in when I talk about narrative stocks, I will be talking about the capex related theme, especially when you talk about the defence names, the power names, you have seen a sizable correction in those set of counters. Do you think that this correction that they have seen now merits a relook at these names? Do you think that they will continue to be a driving force going ahead?Nilesh Shah: So, in a lighter wind, I will say, aasman se patke khajoor pe latke. These valuations have undoubtedly corrected, but they are still relatively high. For example, in defence, there is a great opportunity in exports market, but how many companies have technology that they can cater to exports market? How many companies have capacity that they can cater to exports market? How many companies have products which are futuristic in nature as we have seen the war scenario is changing, a $100 million plane or a tank can be easily destroyed by a missile or a drone.

So, clearly in defence, companies which are catering to local as well as global market, which is futuristic in terms of their product profile and which has capacity to deliver to local as well as global market should do well. Over there, some amount of narrative, some amount of valuation premium is justifiable. But all other defence stocks where valuations are still high, they do not have capacity, they do not have technology to cater to global markets, I think waha pe aasman se patke khajoor pe latke is still applicable.

But also the question then is that when the market recovers and I mean, by recovery, I do not mean intermittent recovery, but a more broad based one, along with of course earnings revival, what do you think is not going to come back and where do you sense leadership will emerge? Will it continue to be restricted towards just banks or do you think it is going to get more broad based?Nilesh Shah: So, it is always difficult to predict where the next bull run will start. Normally, the players change, sectors change and banks have been clearly underperformers so there is a good chance that with valuation comfort, they could lead the charge.

Consumer discretionary space also could lead the charge as there are certain events like tax rebates and 8th pay commission to support them.Will this rally become broad based? Well, it all depends upon FPI participation from a flow point of view or earnings momentum from the growth point of view.While we do believe our growth rates will start inching upwards, it is unlikely that we are going to move into 8% plus handle, we will still be 6.5% to 7% range and with some divine intervention on oil and monsoon and global growth, it may go upwards of 7%, but unlikely it will reach 8%. So, the broad-based rally at least at this point of time looks difficult, unless and until it is supported by growth or it is supported by flows led by FPI’s buying.

You do not expect FPI buying to kick in anytime soon, is it?Nilesh Shah: As of today, if we divide FPI categories, the long only funds, the insurance, the pension, and the passive on the selling side. The sovereign wealth fund and university endowment fund have been buying between October to December 24 quarter.

So, definitely all FPIs are not selling. In the long only insurance pension, probably selling is driven by US based FPIs who are taking money back to US on the promises of tax rate cuts, on the promises of tariffs and make America great again. On the passive side, it has quit emerging market. Emerging markets have underperformed relative to developed markets for last 5, 10, 15, 20 years, that has put doubt in the minds of global investors whether they should allocate to emerging market or not.

Over a valuation point of view, emerging markets are much-much cheaper compared to developed markets. However, people need to see returns before they can try to catch a falling knife. I believe at least in the near term, the FPI selling is likely to continue. Of course, they are all smart investors, so they are not going to sell at any prices. But at this point of time, keeping in mind the vacuum cleaner in America and quit emerging market movement, we do believe that FPIs are likely to be on sell side for some time.

Let us look at the other factors which are in play. So, India, okay, there is a graph which we put out yesterday, that Europe is a rebound trade, China is a tactical trade, and India is a structural trade. Would you agree with it that if you are playing a rebound which is like mean reversion, Europe le lo. If you are buying tactical, 6 mahina, China; anything beyond that buy India?Nilesh Shah: So, one, it is not that people have not put trade on India on a structural basis. We still have close to $750-800 billion of FPI investment in listed companies. There could be another trillion dollar between private equity and FDI. So, people have put money on structural growth story of India. Now, we need to do better. Our GDP growth right now is in mid-single digit, five, six, seven.

We are not able to take tough decisions on reforms like land reforms, labour reforms, farm reforms, judicial reforms. Ease of doing business, we have done a lot, but there is a long distance to cover.

These are the reforms which can take India to 9%, 10%, 11% growth, that is unlikely to happen at this point of time. Now, clearly, if we want to attract money or capital on a structural basis, then our growth rate needs to go higher, not in the current rate.

People have already put in money and they will continue to put money in India as long as we deliver on growth. The second is some divine intervention. When our peers score self-goals, undoubtedly, it benefits us, andho mein kana raja bhi ho sakta hai.

So, we have seen Russia, South Africa, Brazil scoring self-goals. China was scoring self-goals, but they have rebounded very nicely. The amount of leadership they have taken on technology side, the kind of trade surplus they are running at almost a trillion dollar is truly a miracle and that has divided investors which are ignoring China’s capital allocation inefficiency and its political game on Taiwan to go and invest in China.

We either can pray for divine intervention where our peers score self-goals or we can take reforms and continue building on the foundation which we have laid to accelerate our growth rate to high single digit.