Nilesh Shah News: I don’t think 20-30% returns are a birthright; it’s time to invest long term in gold and maintain a neutral stance on equities: Nilesh Shah

Sensex and Nifty are hitting record highs again every day even as there are concerns about not-so-good earnings in Q1. Where do you think we are headed?
Nilesh Shah: If we take a five- or 10-year perspective, the only direction is certainly up. The economy and markets will perform well. If we take a three-, six-, nine-, 12-month perspective, I have no idea where we are headed. On the one hand, we believe that the correction in the market will be shallow and short-term because there is a Triveni Sangam of fundamentals, flows and sentiment.

Despite the subdued first quarter results, the market continues to believe that we are on track to deliver double-digit earnings growth for this year and next. If that happens, the downside risk for the market is limited. Liquidity is very strong. Domestic investors are participating and we believe global investors will also participate. More importantly, sentiment on India today is strong.

Investors cannot go to Russia for Ukraine; they cannot go to China for Taiwan; they cannot go to South Africa for social conflicts, or to Brazil for communist rule. In emerging markets, the options are very limited and India is a brilliant option. Therefore, with the Triveni Sangam of flows, fundamentals and sentiment, I think the downside risk is limited, but volatility is expected over the next 3, 6, 9 and 12 months.

Everyone has attributed the strong recovery to domestic capital inflows, but let’s also look at the risk side. What could be the worst-case scenario for the momentum of domestic capital inflows to slow down?
Nilesh Shah: Domestic investors today expect us to get it right as many times as we want to get a 4 and a 6. People think that a 20-30% return is a birthright. If you look at the return of our overall market over 20 years, it is over 13%. The return for the last four and a half years has been over 21% and the return for the previous 15 years was just over 11%. Now, looking ahead, we expect returns to moderate. If people come with expectations of 20-30-40-50% returns, they are likely to be disappointed and that disappointment could affect cash flows.

So, once the Federal Reserve starts cutting interest rates in September, the Reserve Bank of India could follow suit at the October meeting. What impact do you think this could have on banks that are already struggling with deposit growth?
Nilesh Shah: Therefore, our feeling is that the RBI will not succeed and follow the Fed so quickly. Unlike the US, where the economy is struggling and is being supported by very loose fiscal policy, in India fiscal policy is
Monetary policy is tightening, growth is above average and inflation is within the RBI’s target range. Therefore, there is no urgency for the RBI to cut rates.

However, we believe that private banks today are waiting for clarity on the liquidity coverage ratio. The guideline that has been announced by the RBI for consultation may impact the margin of banks by 10-15 basis points depending on how it is implemented. So, the market will probably wait for certainty on those guidelines and then take a decision. From a valuation point of view, some of the public sector companies and private banks have very reasonable valuations. Of course, there are some banks where the stock float is limited and the valuations are like FMCG companies. We believe that when supply comes on those counters, those stocks will get a good correction.

If the stock market falters, will investors return to trusting bank deposits? SBI Managing Director Ashwini Kumar Tewari has recently suggested this. What is your take on it?
Nilesh Shah: Frankly, I have never been able to answer this question. When I look at the Reserve Bank of India data between fiscal year 2021 and fiscal year 2023, I see that it was the period when markets performed extraordinarily well and the total amount of household investment was about Rs 4 trillion. They invested about Rs 2 trillion in direct stocks, bonds, debentures, corporate fixed deposits, etc. They invested Rs 9 trillion in currency notes.

To date, no one has seen the number of banknotes in their home double. (no one has ever doubled their money by keeping it at home) but a large portion of Indians believe If you keep bills at home, your income will double. (Many Indians believe that they can double their money if they keep it at home.) I think one day Indians will mature. They will realise that you cannot double your money if you keep it at home and money will start flowing into fixed deposits and capital markets. 93% of the financial sector allocation of Indian households has a negative real return or marginal real return. Only 7% is invested at potentially positive real return.

If you invest 93% of your savings with negative real returns, how do you get rich? How can you be rich if 98% of your savings have a negative real return? Once people realize this, money will be available for both the capital markets and the banking system.

In this situation, what should be the asset allocation strategy? What would you advise investors? Would you recommend them to reduce their exposure to equities?
Nilesh Shah: Our recommendation is very clear: always follow the asset allocation dharma. If you are a Rahul Dravid type batsman, then there is no need to hit the ball first; and if you are Virender Sehwag and the ball is half-volleyed, then swing the ball boldly. You live according to your nature. (Stick to your strategy. If you’re a Rahul Dravid-type investor, you don’t have to hit the first ball for a boundary. If you’re a Virendra Sehwag type and get a half-volley, hit it for a four.

This is the time when you should be long-term because rates are going to be cut. You should be invested in gold because central banks are buying gold. And you should be neutral in equities with some tilt towards large caps. If there is a correction in the market, you can be overweight. But with this valuation, it does not make sense to be overweight. If you are overinvested in equities, subject to your investment objective and risk profile, please book the profits.

If you are not sufficiently invested in your risk profile and investment objective, make a systematic transfer plan or SIP for investing in shares.