$19 Billion Fund Favors Contrarian Bet in India Poll Season

(Bloomberg) -- It's hard to predict whether India will re-elect a majority government next year. But one fund manager has advice for investors: go against the crowd.

If stocks start to rise on expectations of a stable administration, investors must book profit and re-enter should the results confirm the outcome, said Nilesh Shah, who oversees $19 billion as chief executive officer of Kotak Asset Management Co. Conversely, declines driven by fears of a coalition government should be bought into. The reward -- if the vote surprises positively -- will likely outweigh the risks if results indeed signal a multi-party alliance.

“We ask investors to consult their astrologer on who the next Prime Minister will be and the shape of the new government because we don't have the ability to predict,” Shah said. “If you don't have an astrologer, please play contra.”

Prime Minister Narendra Modi's Bharatiya Janata Party will contest with the main opposition Congress party in several polls starting May 12 in the southern state of Karnataka before a national ballot in 2019. Modi's popularity has taken a hit among voters in some pockets and a change in political expectations may undermine a rally that's almost doubled India's market value since he swept to power in May 2014.

“Twelve months may be a long period in politics but will the sentiment be impacted by the Karnataka results? The answer is likely yes because investors want to price in the May 2019 election risk,” Shah, 49, said.

The India VIX index, a measure of volatility expectations, halted a eight-day streak of gains, which was the longest in three years.

A win in Karnataka will help the BJP deepen its footprint in south and wrest one of the last big state from the Congress party. Even the formation of a BJP coalition government will be welcomed as it would signal that the ruling party can still lure allies that it will need to succeed in the national poll, CLSA said in a note last month. Results are due on May 15.

Shah shared his views in an interview in Mumbai:

What is the rationale behind the ‘contra' strategy?

• “We can't predict election outcomes. We're telling investors that if the market prices in a stable government, take some profit. If the market is right you can still re-enter at slightly higher prices. But if it is proven wrong, you will see much lower levels.
• “On the other hand, if the odds of a coalition government rise, your existing portfolio won't be in a good shape but take risk put more money to work. If the market is right, you may loose 5 percent, but if results surprise positively, you will get 25 percent.”

What is your assessment of the corporate mood right now?

• “Of the managements we've met, those who were pessimistic have become cautiously optimistic. The guys who were cautiously optimistic have become optimistic, and those that were optimistic have become super bullish. Everyone has moved up one notch. That's the summary of our last 90 days of meetings.”

When do you expect the private-sector capex to pick up?

• “Capex will begin but it is going to be patchy. One, if interest rates are high and the currency is overvalued, entrepreneurs have less incentive to invest. There is also the ease of doing business, which the government is trying to improve. Finally, there is a political angle -- if the general elections are in 2019, it is reasonable to expect that some capex may be deferred.”

What are your views on the March-quarter corporate results?

• “We must appreciate the constraints in which the economic performance is coming. There are very few countries where nominal interest rates are as high as ours. Indian entrepreneurs are running a hurdle race while others are running a normal race.
• “Performance is coming despite higher rates and an overvalued currency. That is why it is more credible.”

To contact the reporter on this story: Nupur Acharya in Mumbai at nacharya7@bloomberg.net.

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Ravil Shirodkar

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