 "Indian investors need to step up their equity investments: Nimesh Shah")
As we are heading towards a general election, how should investors play this market?
The general election results remain crucial. While the outcome is unknown, what is certain is that it will play a significant role in the market. A government focused on growth, lower inflation and better governance will be welcomed. However, if we unfortunately find a government at the Centre that is not pro-growth, it may dampen market sentiments. In such a situation, we may see specific sector bets outperforming amid volatility.
We cannot afford a situation where industrial growth continues to remain subdued for an extended period of time. A country like India whose population grows at an annual rate of 1.5 per cent should ideally have industrial production growth of five to six per cent.
We see industrial production normalising at six to eight per cent annually in the next three years. Hence, we have taken a call to stick with cyclical sectors, in line with this view. We believe small-and mid-caps should do well over the next three years backed by growth in industrial production.
Fortunately, over the past few months, India has managed to put things under control, especially when it comes to the current account deficit, which now looks manageable. The rupee seems well in control. In such a situation, investing in fixed income looks attractive.
While you see industrial productions normalising over a period of time, what’s your take on inflation and interest rates?
Inflation is headed for a fall. The main reason for inflation remaining high is the steep rise in food prices. We believe a good harvest of both kharif and rabi crops is likely to result in much lower inflation. Consequently, we recommend fixed income funds for investors. Interest rates are also likely to soften.
What is your assessment of recent corporate earnings?
Corporate earnings in the recent past have been encouraging primarily as many of our larger companies have revenues in dollars, which have risen sharply due to the movement in the foreign currency markets. Hence, we believe while corporate earnings of export-oriented companies, global companies operating in India, and listed companies with a global footprint have been good, it is more important to see an improvement in the earnings of small-cap and midcap companies, and in indicators such as the index of industrial production, for the country to have a sustainable market.
Do you see any major negative impact of the US Federal Reserve’s tapering?
As long as our current account deficit (CAD) is under control, we don’t expect the US Fed’s taper to have a significant impact on our markets. However, if the CAD is not controlled, we might see volatility in the currency markets, which will affect the rest of the economy. Having said this, we believe the CAD will stay within an acceptable range since we are in pre-election times.
What would you advise an investor at this point of time in terms of a portfolio allocation strategy?
Interest rates are at an all-time high and equities valuations are low. We do not see an uptrend for gold or real estate. We strongly advise investors to reduce their investments in physical assets and move to financial assets. Fortunately, this appears to have commenced; Indian investors are slowly moving out of physical assets like gold and real estate, and investing in bank deposits or fixed income, a good sign. An increase in bank deposits will ideally ease interest rates. We believe Indian investors are significantly under-invested in equity. They need to step up their equity investments.
How do you see the mutual fund sector shaping?
It has good fundamentals – a good number of healthy asset management firms and extremely good regulation. However, it can do more to increase consistency of performance and differentiated products for various client segments, and better education for investors.
The perceived challenges are actually huge opportunities for growth and further penetration, and this can be achieved over time using technology. The key lies in strengthening distribution networks and enhancing levels of investor education.