As Indian equity markets enter Samvat 2083 with renewed optimism, Nilesh Shah, Managing Director of Kotak Mahindra Asset Management Company, believes investors should temper their return expectations, maintain disciplined asset allocation and focus on opportunities across market segments.
In an interview with NDTV Profit ahead of Diwali Muhurat Trading, Shah said a combination of cheaper valuations, expectations of lower crude oil prices and a reversal in the artificial intelligence trade had helped revive investor sentiment. Foreign institutional investors (FIIs), who had been net sellers, have also started returning to Indian equities.
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According to Shah, Indian markets have become more reasonably valued after spending nearly two years consolidating while corporate earnings continued to grow. He said valuations had become around 30% cheaper during this period, creating room for renewed buying.
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However, the market veteran cautioned investors against expecting outsized gains. With markets likely to deliver high single-digit to low double-digit returns, those banking on 30% annual gains could be disappointed.
On valuations, Shah sees a relatively better risk-reward opportunity in large-cap and mid-cap stocks compared with small caps. While large and mid-cap stocks are trading below their historical average valuations, small caps command a marginal premium.
He recommended investors remain marginally overweight on large and mid-caps and marginally underweight on small caps, while continuing to identify opportunities through bottom-up stock selection.
Shah identified banking and financial services, along with premium consumption, as his preferred medium-term sectoral bets. Banking stocks, he said, have become attractive from both earnings growth and valuation perspectives after significant FII selling.
He also expects premium consumption to benefit from the implementation of the Eighth Pay Commission recommendations, which could put additional purchasing power in the hands of nearly 20 million government employees and pensioners.
Automobiles, alcoholic beverages, travel and tourism, and consumer durables could benefit from this spending, with demand increasingly shifting towards premium products.
For the longer term, Shah remains bullish on modern manufacturing, pointing to Indian companies becoming increasingly competitive globally through technology and innovation.
He also flagged a potential earnings risk if the government begins sharing the burden of higher oil and fertiliser subsidies with corporate India and consumers. Such a shift, he cautioned, could slow corporate earnings growth.
On taxation, Shah called for a more consistent capital gains tax regime, arguing that investors should not be subjected to both Securities Transaction Tax (STT) and capital gains tax when STT was originally presented as being levied in lieu of capital gains tax.
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He also made a case for exempting foreign investors from capital gains tax, in line with practices in several other jurisdictions. More importantly, he stressed that any tax policy changes should have longevity rather than offering temporary exemptions that could encourage investors to withdraw money.
For domestic investors, the broader message remained one of patience and discipline.
Drawing an analogy with cricket, Shah said long-term investors should treat the market like a Test match rather than a T20 game. His advice for Samvat 2083: maintain asset allocation, use market corrections as buying opportunities and stay invested for the long term.
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