Gold can rise further if China diverts some of its forex: Nilesh Shah

In a Q&A, the MD & CEO of Kotak AMC explains why SIPs make a good bet in the current scenario and why leveraging can prove disastrous

Systematic investment plan (SIP) investors stand a good chance at investing, given this is an opportune time to average. Nilesh Shah, managing director and chief executive officer, Kotak Asset Management Company, in conversation with Rajesh Bhayani sounds a note of caution saying this is also the period where leveraging can be potentially lethal. Edited excerpts:

All financial asset mutual funds — equity and debt, equities, currencies, and most commodities — are caught in a downward spiral. The only segment with protected capital is fixed deposits and small savings.

There are many debt funds - overnight funds, liquid funds, ultra short-term bond funds, short-term bond funds, dynamic bond funds, PSU bond funds, corporate bond funds - that have yielded positive returns since the beginning of the coronavirus disease (Covid-19) pandemic. They could have given negative returns for a short duration. That is not because we have lost money. It is because we do mark-to-market, based on interest rate movements, which small savings or bank deposits don’t do. If one remains invested in MFs for the tenure of an equivalent FD or a small saving,  MFs will outperform despite market choppiness.

When do net asset value (NAV) and equities show signs of revival?

The equity fund NAV is linked to the market movement. Equity is for the long haul. Between February 19 and February 20, the 12-month SIP returns in our mid-cap equity fund ranged between minus 9 per cent and 26 per cent. When the markets were low, returns were negative. When markets were up, returns were  impressive. In the short term, they will be driven by flows. In the long term, fundamentals will prevail and reward disciplined investors.

Several SIPs have fallen below cost, considering medium-term average NAVs. What do you advise retail investors?

They have to continue their SIPs unless they have a financial exigency. Regular investment is one way of averaging in the rough seas. If one doesn’t buy when the index and valuations are down, how will money be made? One has to manoeuvre the crests and troughs of the market and invest via SIPs unless one is doing disciplined asset allocation.  

Gold has been the only asset where investors have made money. Should they buy more or exit?

Gold prices have done well when interest rates were low and liquidity was high. Gold moved from $750 in November 2008 to $1,875 in September 2011, on the back of lower interest rates and high liquidity.
 

Similar liquidity and interest rate situation is likely to prevail from here on. Gold price will be supported. Gold can see a bigger jump if China decides to diversify a part of its foreign exchange reserves from dollar to gold. There is a nascent but growing movement in the US and the world to seize Chinese assets and use them to settle coronavirus claims. This low probability but high impact event could push China to buy gold. If that happens, gold prices can remain elevated for some time to come.

Global markets remain uncertain, with the Covid-19 crisis leading to China on one side of the Great Wall, the world on the other. How do you see this divide impacting markets and asset class?

Covid 19 is a health crisis leading up to a financial meltdown. It is the most unprecedented crisis we have seen in the last century. This is long haul and is significantly going to impact asset prices. We believe the time taken for a medical solution and the extent of fiscal and monetary stimulus will decide how the post-Covid-19 recovery takes place. Assuming a medical solution will emerge early on and fiscal and monetary stimulus will be high, we see equity and gold prices doing well. Fixed income could see some volatility. This is the period where leverage can be fatal. In the most unfortunate scenario of very low fiscal and monetary stimulus and no medical solution, equity could give up on the gains made; gold and fixed income may provide better return.Pre-empting volatility, investors must follow a disciplined asset allocation.