Investors will have to take a bottom-up approach instead of the top-down approach if they want to make money in India's equity market In 2020.
That's according to Nilesh Shah, managing director and chief executive officer, Kotak Mahindra Asset Management Co Ltd., who said it is likely that parts of the funds invested in large caps will flow into small and midcaps.
“We have seen wide divergence between a well-run company vis-a-vis a not-so-well-run company. So, you will have to be far more bottom-up this year compared to the past, in order to make money,” Shah said. “With that caveat, we still think opportunity to make money across the board is more in small and midcap rather than large cap.”
The NSE Nifty 50 Index gave a return of nearly 13 percent in 2019. The growth, however, was led by a handful of stocks, leading to a large divergence within the index. The broader markets continued to remain under pressure with the NSE Nifty Midcap 100 and the NSE Nifty Smallcap 100 falling for the second consecutive year—4.9 percent and 10.7 percent, respectively.
The divergence—caused by a combination of poor sentiment, economic slowdown, a weak financial sector and slump in credit lending—has been sustained by a flow of passive funds into quality large cap stocks, Shah said.
“When passive flows keep on chasing the stocks, they don't care for valuations, they don't care for price, they just have to replicate the index. In absence of any fresh supply and regular demand, these stocks keep getting re-rated and create an illusion that markets are reaching all-time high levels,” Shah said.
This trend will continue for a while in 2020 until some money from quality large cap stocks moves into small and mid cap stocks because of their attractive valuations, he said.
From a sectoral point of view, Shah expects private financial companies—both lending and non-lending—to do well as they gain market share from their public sector counterparts over the next few years. Other sectors of interest include chemical specialty and companies making building materials.
“Real estate and construction are bottoming out and there will be a gradual nascent recovery. Instead of playing real estate companies, it might be better playing building material companies where governance standards are far better,” he said.
Watch | Kotak AMC's Nilesh Shah's outlook on markets in 2020
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