Prices of Brent crude have surged to a four-year high, troubling policymakers and consumers alike. Nilesh Shah urged equity investors to take note, too.
Even as the markets are trading below their historical average, the managing director of Kotak Mahindra Asset Management Co. Ltd. said that oil could be the biggest risk when it comes to downside in equities.
“Small caps, which were trading at 33 percent premium at the start of 2018, are now trading at a 5 percent discount,” Shah told BloombergQuint in an interaction. “From a valuation perspective, we have reached historical averages and could trade below them.”
He said that if oil prices rise further, there will be deterioration in markets, adding pressure on equities. Shah, however, said that there could be “some amount of luck” when oil prices cool.
Shah said that capital flows were needed to offset “the splurge” due to imports beyond our means such as oil, electronics and gold. “The outflow of cash by foreign investors have contributed to further downward momentum.”
He said that Indian markets have been “an outperformer compared with China in some sense”. “If, as an investor, you were long India and short China, it would push investors to take some profit out.”
The asset manager supported the Reserve Bank of India's move to tighten the mismatch in assets and liabilities of non-banking financial companies. “I expect a glide path for the solutions,” he said. “Many NBFCs are into consumer credit, where the lending cycles are 10-12 months long and not the same as IL&FS.”
He remained hopeful that the central bank will account for the different genres of NBFCs as the asset-liability management mismatch will be different for different institutions, saying: “If we try to change yesterday's system today, it would create jitters.”
Watch the full conversation here:
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