Markets Tend To Bottom Out A Lot Earlier Than Outcome, Says Envision Capital's Nilesh Shah

Global markets have been witnessing volatility due to the extended period of uncertainty, but India is set to have a relatively minimal impact compared to Asian peers and other emerging markets, according to Nilesh Shah, founder of Envision Capital.

"There is going to be some impact and we will need to live with that uncertainty as it could last for a few months before we see how growth and earnings come through," he told NDTV Profit on Monday.

There will be a period of consolidation before the markets develop a sense of direction, according to Shah.

As an economy, the impact is going to be a toned down compared to other emerging markets and Shah anticipates a slip in the gross domestic product to be less than 1%.

"Maybe from a 6.5% GDP growth, we will slip down to 6% or so. This is a fantastic place to be, given economies like the US might slip into recession. Large economies like China are also set to see a significant shave-off," he said.

In that context, the impact is relatively less. Now with a market focus, Shah's concern is on two things.

"The bigger challenge for the markets is the fact that the markets move with sentiment and liquidity in the short term. And because of uncertainty, both of these are going to get impacted, according to Shah. "This is more risk to me that the deterioration of the growth outlook."

He underscored that the domestic markets would have to navigate through this uncertainty for the next one or two quarters.

Unlike the crises in the past, the element that sets this freefall apart was unilateralism. Unlike the pandemic and the 9/11 attacks, there are no unified moves from countries and the impact is uncertain, according to Shah.

"Among all the crises that we have seen, there was conciliation and coordinated response to the big challenges. We are now in an era of unilateralism and this has not played out before," he said.

Shah added that the markets do tend to exaggerate the outcome, pointing out that it had peaked out in September but the event was unfolding in April. It may take another 12 months for the entire outcome to play out but Shah highlights that the markets will bottom-out a lot earlier.

"There will be a situation where the valuations become so attractive that it more than factors in like a base-case scenario. It's going to take a few months to see how everything plays out so we will still have to go through volatility," he said.

The IT large caps have been the most overrated even before the crisis as these companies have only seen single-digit growth. The fortune 500 companies' spend has been non-discretionary around maintenance and applications, Shah said.

Pointing out that this is a good time to be constructive on the IT sector, Shah said that closer to 30 PE multiples, investors have to take their money off the table.

"It will take a couple quarters to turn around but it is not the end of the world for IT companies. Yes, growth rate will see a chip off on a temporary basis but with over a one-year outlook, the sector will see the spending bounce," he said, adding that the market will see that much ahead as well.

A few themes have a lower degree of impact when compared to others. The most insulated pick, according to Shah, is a theme that is based on domestic growth.

"Domestic growth through consumer-led companies like fintech and consumer products are only set to see second order impacts. I also believe the government will up its spend on infrastructure as a third measure," he said.

The conventional ways of fiscal and monetary measures will see infrastructure as an additional leg up for economy and growth. "Spotting businesses that are providing equipment, services and elements for the infrastructure products will be the picks," he said.