We believe this is a market where every correction is an opportunity to buy. So maintain your asset allocation and stay invested for the longer term. Markets will go up and down. You do not have a choice just ignore the near term volatilities for longer term boom, says Nilesh Shah, MD, Kotak AMC.

Is it time to exercise caution or is it time to understand that we are indeed going through what could be called the mother of all bull markets. There is a very strong case for the market have corrected by now but calling the top in this market top has been a futile exercise. So what should one do? Sell and regret or hold and ignore the obvious risk?
There is no way you can predict where the markets are going to go, but you can always react to the market’s situation. This is a fair value market and it has run up sharply. It is supported by liquidity flows emerging in global as well as domestic markets. But at the same time, it is supported by revival in corporate earnings.

One could argue whether earnings are in line with fundamentals three months back but there is no wide gap between fundamentals and earnings today. So please maintain your asset allocation. We believe this is a market where every correction is an opportunity to buy. So maintain your asset allocation and stay invested for the longer term. Markets will go up and down. You do not have a choice just ignore the near term volatilities for longer term boom.

The fear factors in the market are mainly three — what will happen to growth; how inflation will haunt us and the impact of the delta variant. But for the moment, none of the fear factors have translated into reality. Bond yields are under control, inflation is ebbing out and it appears that we are in a sweet spot of growth. So, what will cause this correction?
Any correction can happen on three accounts — when sentiments turn bad. In the near term, sentiments are linked to Covid-19. As long as we are able to go out to pursue our business activities, vaccination keeps on rising, active cases keep on falling and the sentiments are likely to remain positive.

The second thing is cash flow. Today flows are coming in from domestic investors both retail HNI as well as institutional investors like mutual funds, insurance companies and pension funds. Foreign portfolio investors are coming for the growth prospect of India. Now if our growth falters, undoubtedly some of this cash can reverse, but as of today, the expectation is that growth is likely to accelerate rather than falter.

The third and the final thing is the delivery of performance results compared to the expectations. Today the market has a certain earnings trajectory in buying and if that trajectory gets impacted for a variety of reasons including long term inflation, then certainly there could be correction. But as of today, inflation does not look like a problem; 5.%3 is fairly lower than market expectations. The market is able to see through the numbers rather than going by one’s thought process and that collective wisdom today is indicating that there will be near term volatilities, ups and downs in the markets, some corrections here or there but there is unlikely to be a bigger crash unless and until, one of the three fundamental sectors gives away. Sentiment can turn bad because of the third wave, earnings trajectory will get downward or money flow reverse because of the faith in the long term growth prospects.

9 out of 10 fund managers are of the view that there are excesses in the market whether it is on the valuation front or whether it is based on historical benchmarks. Where do you see the excesses in the bull market which are currently getting ignored?
More than the sectors, it is the stocks where one can see some excesses by and large. Domestic institutional investors have avoided companies with lower governance standards. Also, excesses are visible today in some of the companies with limited floating stock or there is a concentrated buying. Limited floating stock along with concentrated buying can result in higher inflation and higher valuation, We are consciously avoiding such traps. So, there are pockets of overvaluation in the market but that is primarily driven by low floating stock or concentrated buying or both.

Is this the point in the market where you think the erstwhile relative underperformers will take centrestage and a rotation will take place?
I would like to caution investors that when looking at the data, please try to look through it. We run India’s largest arbitrage fund. In an arbitrage fund, when I buy or sell shares, I am not taking a fundamental view on the company, I am only interested in arbitrage by buying cash and selling futures. If you include those positions in my cash positions, that I am taking a fundamental buy or sell call, you are going to come to a wrong conclusion. So please try to focus only on non-arbitrage stocks rather than trades which are for arbitrage.

Number two, when you are analysing my trend, do it with respect to my position. Suppose in stock x I am super overweight in booking profit. You will consider it as a sell, as if I am negative on that stock; but I am not negative on that stock. I made so much profit that I have to book profit to debt. Similarly, I might be underweight a particular stock significantly and I am buying something. You may consider that I am positive on that stock but it might be that I just want to build small positions so that I can monitor that stock and I am still underweight vis-à-vis that index.

So do not look at absolute numbers in a mutual fund’s trading positions or trading data. Try to analyse that data with respect to the thought process and the position that will give you a better conclusion. Rotation in market is natural, today’s underperformer will become outperformer tomorrow if fundamentals play out and today’s outperformer will have to consolidate and rest a while before they can move further. As a fund manager on a smaller size fund, we can probably play this kind of rotation but on the larger size fund, if we try to play rotation, we will incur more impact cost and liquidity risk on our portfolio.

So we try to maintain a core portfolio which is made up of efficient capital allocation, efficient companies. We hold it over a long period of time. Many of our top 10 holdings have remained constant. They go up and down in terms of weight but in terms of names, they have remained constant for years. There is a satellite portfolio where we try to rotate based on the valuation and based on the expectations. This is a fairly complex exercise, based on the monthly data. You would not be able to analyse what we are actually doing.

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By Marek

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