India becoming a single country allocation; offering unbeatable combination to FPIs: Nilesh Shah

“If you have missed the last 30 years boom it does not matter, the same picture is going to come in a fast forward manner over the next five, seven years, just grab the opportunity,” says Nilesh Shah, MD, Kotak AMC.



Talking about markets and talking about investor sentiments in general, so far how has this year been? Investors have gone through a lot, especially the ones which are new to the market. They have learnt a lot. This entire phase is a very good learning experience for people who are new to the market and new to investments. What has been your observation as an AMC person?
Initially when the market used to correct, we used to go out and tell investors not to get worried, that India’s growth story is long term and so on. Nowadays, when the market corrects, they give us the money and say do not get worried, we will send you money, you go and buy. I think the maturity which our investors have shown, the support which mutual fund distributors have provided in handholding 3.5 crore customers, has brought a sea change.

This was the first year in my three decades of career where FPI selling did not impact the market as much as it would have and it is all thanks to the retail investors and mutual fund distributors who have ensured Rs 12,500 crore of SIP flows month after month.

Do you this is staying intact because India is an emerging market and it could be slightly expensive for FIIs but that time horizon could be for a few years. In the long term, has it really priced well?
I will give you an incident; I was pitching for India with one very large fund manager and one of my slides was that India is trading at a huge premium to its emerging market peer group. Our historical average premium is about 40% over MSCI emerging market and now we are at 80% plus. He said, change your outlook. On a one-year ,basis India is expensive but on a five-year basis, this is the cheapest emerging market. When you sit on my chair you do not make investments on a one-year basis, you make investment on a five-year basis. Now this was a revelation.

I think India is transiting from being part of global emerging markets to becoming a single country allocation. We will get money on our fundamentals, on our earnings growth no matter what happens to the emerging markets if we can make that transition. And the beginning of that transition has begun.

But the challenges are still intact. If the FII selling is not a trigger, then we still have the war going on, oil prices, the demand supply constraints. We are talking about India’s growth story but then what is it that FIIs are looking at?
So FPIs are looking at three things in India; earnings growth, we are superior to our emerging market peers. When I started my career we were a $300 billion dollar economy and $300 billion dollar GDP in the ‘90s. Last year, we were a $3 trillion economy and $3 trillion GDP. So roughly, 10 times growth.
Over the next 30 years, can we grow that 3 trillion to 30 trillion? The answer is possible. Now whether this happens in 25 years, 30 years or 35 years one can dispute but can anyone dispute the direction? The answer is clearly no. So there is earnings growth.

Second is the governance standard. In Russia, the largest private sector oil company’s chairman fell down from a hospital window and died. He is the eighth businessman to die in this suspicious scenario.

In China, the largest private sector enterprise’s most celebrated entrepreneur has been made to sit at home. So we have governance which is far superior to our peers. And finally we are focussed on green, we will be the only major economy in the world which is on its way to achieve the Paris Accord target by 2030.

So green, growth and governance – India offers an unbeatable combination to FPIs.

Let us talk about China because this is a very interesting phase for India to become a global manufacturing hub. But as per the predictions made by IMF, what according to you would actually help India supersede in this particular area and what are the factors that we should actually bank on and work on towards?
China will remain a manufacturer to the world but if we leverage our strengths today, we areglobal leaders in automobiles, mobile handset manufacturing and generic pharma. We have certain advantages, for example we grow a very good amount of cotton, we know how to spin yarn, we know how to weave fabric but we do not know how to stitch a garment. Now is that a difficult thing? The answer is no.

China’s garment exports will be $250 billion, we are stuck at $16-17 billion. If we go niche, area by area, India can become a reliable supplier in part of the global supply chain. If we look at India’s problem in one line; there are 10-15 crore Indians which are working in agriculture. They should be working in industry whether it is manufacturing or services it does not matter. And how do you create that employment, garmenting can easily take a lot of workers.

What according to you is going to be an actual Diwali gift for the Indian investors talking about market trends or the growth story that we just discussed about India, what is going to be the major dhamaka or a Diwali pataka in that sense for us?
The best thing for an Indian investor is the India growth story. We are transiting from a $3 trillion to $30 trillion economy over the next 30 years. Direction is certain, timing could be different. In a rising tide, every boat will get lifted and that is the opportunity for Indian investors.

Now if someone says I do not have a 30 year horizon fair enough but over the last 30 years, we created about $2.7 trillion dollar of market cap. Next five, six, seven or 10 years, we will create a similar market cap. So what you have seen in a slow motion of 30 years you will see in a fast forward in next five to seven years. That is the best opportunity for India. If you have missed the last 30 years boom it does not matter, the same picture is going to come in a fast forward manner over the next five, seven years, just grab the opportunity.

When it comes to investing one needs to have a longer time horizon but we also have viewers who want to know where money will be made in a few quarters and in one year’s time. Which are the good sectors according to you that might just reap you a lot of profits and a few sectors which could be challenging for two years?
As for challenging, it is never the sector, it is always the management. If a boat has a hole it can never rise whether it is low tide or a rising tide. So never ever invest with bad managers and bad governance. That is the only thing to avoid.

From a sectoral point of view, subject to good management, we think the banking sector will do very well. Today if you have to do a borrowing or a lending, you are likely to go to five banks. So a lot of consolidation is happening. Cleanup has already happened as a lot of NPAs are fully provided for. Interest rates are going up and so margin will expand.

Finally valuations are reasonable. We have seen not only the top tier banks but also the mid and small tier banks bouncing back quickly. Banking looks like one sector which will do well over the next couple of years.

Manufacturing in India thanks to China plus one as well as Europe plus one, is slowly picking up pace. In chemical sector, we have seen Indian manufacturing companies doing very well, the same trend will get repeated in many things. And this time opportunity is not only for big companies but also small companies. A place like Morbi, exports tiles worth more than Rs 15,000 crore. They are facing the world confidently saying “cheaper than China and better than Italy”. These are the small, medium enterprises from Morbi collectively dominating the world. I think there is a renaissance coming in India’s manufacturing sector – be it capital goods, be it industrial goods, be it engineering companies or chemical companies. There will be many more such sectors including auto components. So we have a great opportunity in banking and manufacturing if we can pick up the right management.

We are seeing a lot more traction in passive investing and even AMCs are launching a lot of index ETFs and passive funds. Is this an investor interest shift or is it something that we are seeing in the west and following in India? Largecaps, specifically active funds are right now not able to perform. Is that the reason for the passive investment trend among investors?
To me, it is a glass half full or half empty syndrome. Bulk of the AUM in passive categories is thanks to the government. In equities, it is EPFO contribution or CPSE and Bharat 22 kind of ETFs where government gives incentive for people to invest. Rest of the investors have not yet really picked up passive funds as much as it is being made out to be. The alpha generation is still not over.

If I look at Kotak Mutual Fund schemes across equity in hybrid bulk of the funds, most of the periods, we have been generating positive alpha and this is despite the fact that index fund per se are underperforms benchmark indices because of transaction costs, variety and other things. My feeling is that as a manufacturer I have to give both the choices. As long as I am adding value to my customer, my active funds will sell. The day I stop adding value, my passive funds will sell.