Nilesh Shah Advises Investors To Move To Quality Stocks, Says Gold Bull Run May Continue

While the expected 50-basis-point cut in the benchmark interest rate by the US Federal Reserve has already been factored in, Kotak AMC MD Nilesh Shah has advised investors to slowly move to quality stocks from momentum stocks.

Shah told NDTV Profit that the definition of the quality and momentum stocks might differ from investor to investor. According to him, this is the time to move from low floating stocks with concentrated holdings and expensive valuations to high floating stocks that have market discovered prices and reasonable valuations.

Low floating stock means there are less number of shares a company has available to trade in the open market.

"We will see stock specific movement," he said, adding that while the broad correction in the market will be shallow, there are stocks which will see pain.

"In some sectors, markets are discounting too much optimism," Shah said, pointing to the 'exuberance and irrationality' which has led to momentum stocks outperforming.

Capital goods are trading at 'crazy valuations', and real estate and construction are also showing that trend, he said.

He recommends investing in pockets of IT, FMCG, pharma, chemicals, banking where valuations are reasonable. "They may not start outperforming today but over a period of time stocks are slaves of earning power," he said.

According to Shah, the US Federal Reserve will have to convince the equity market that it is cutting interest rates because inflation has come down. At the same time, it will have to convince the debt market that the rate cut is due to the growth slowing down and there is a need to boost economy.

"If Fed can pass two different messages to markets then I believe they would have done a great job," he said.

On how India will benefit if the cost of capital starts coming down in the US with the US dollar weakening, he said, that there's a reasonably good chance that capital will start flowing out of US into emerging markets.

"A lot of money comes on the passive basis now and India has the highest weightage in MSCI emerging market indices," he said. "With FOMC cutting rates resulting into weakening dollar and lower yield expectations and increasing more capital flows to emerging markets, Indian markets should be beneficial," said Shah.

Shah added that investing in equity or debt depends on the time horizon. From a 3-month view, Indian debt is attractive, but in 10 years, Indian equity is more attractive, he said, adding that any investor cannot expect a "red carpet" entry in the market.

There will be opportunities once in a while like COVID but time will make money and not timing, he said.

Shah expects the overall bull run in the gold prices to continue.

"Central bank had become like Indian housewives, regularly buying gold and not selling," he said, adding that the buying is likely to continue as people diversify away from securities especially of western bloc.

In the banking sector, he said, investors will have to wait and watch on how liquidity coverage ratio guidelines come as those could have adverse impact on NIMs (net interest margins) of banks.

For investors in public sector mutual funds, which have enjoyed stellar returns, Shah recommends staying invested in active funds.

If you are in passive funds, he advises looking at the composition. If it's tilted towards low floating stock counters which are highly overvalued, then it's time to book profits in a calibrated manner, he advised.

"Between large, mid and small, try to go for companies which have leadership in their industry, able to withstand tech disruption which is coming, and where business fundamentals and valuations are reasonable," said Shah.

He also advised investors to be careful while investing in primary markets. "Many of them are getting listed at a premium to listed players and over a period of time that will get corrected," Shah added, stating that grey market premium is not reliable.