Real Life Lagaan Being Played Between Domestic And Global Investors, Says Nilesh Shah

Nilesh Shah: The simple answer is that sellers are more aggressive than buyers. Why have suddenly sellers become aggressive? One, partly it could be profit-booking. Our markets have delivered tons of returns to investors and people don't mind booking some profit.

Second, there are concerns emerging globally. Some people say it is yen carry trade reversal. Some people say it is a geopolitical risk in Bangladesh, Israel, Iran and so on and so forth. My feeling is that it's a combination of everything which is pushing sellers to sell aggressively and buyers to bid conservatively and that mismatch is resulting in market correction.

Nilesh Shah: One, the whole market has been going wrong about the US economy, including the US Fed. From inflation is transitory and will remain elevated for a longer time, to now looking at cutting rates to support the economy, has shown how difficult it is to predict the US economy, even by the mighty Fed.

Our knowledge of the US is limited and our linkage to the US economy is also limited. Barring sectors like technology, which get influenced significantly by the US economy, our domestic focus sectors have very limited linkage with the US recession.

So my feeling is that our markets have run up a lot. People don't mind doing some profit-booking and the cause could be US recession today, Fed cut tomorrow, yen carry reversal day after tomorrow, and geopolitical risk some other day.

Nilesh Shah: So, essentially it was a back-of-an-envelope calculation to show how the market is far more forward-looking. There are about 359 stocks, which have delivered more than 100% returns since the Covid lows in BSE 500 stocks.

There are 28 stocks today, compared to 93 from 2020 pre-Covid, which are trading at more than 50 years. That means they are discounting the earnings of the company as much as in 2024.

Third, I looked at returns from the broad market at 22% whereas the 20-year return came at 14%. It meant that from 2004 to 2020, the returns were subdued. Then, 2020 onwards, returns took off. That means that at today's valuation, one will have to moderate return expectation.

So, this was more of a back-of-an-envelope calculation on the BSE 500 to suggest how markets are far more forward-looking and extremely optimistic about the future. Undoubtedly, if the momentum of earnings growth continues, these numbers will change. So limited point here. Markets are optimistic. They are discounting the future very, very positively.

Nilesh Shah: There are many people, who say this is all due to domestic money. Undoubtedly, it is domestic money. But no one comes here to lose money. They all come here to make money. And in the markets, we have all kinds of people—some experienced, some not so experienced.

My feeling is that overall, people are positive on the Indian economy. There is visible growth. There is good governance and there is good corporate profitability while, despite market run-up and trading at an all-time high level, our valuations are not at all-time high level. Albeit, it is trading at premium to other peers. So my feeling is that it's a combination of not just liquidity. It is also confidence about the future growth and to all those people, who are bearish on the Indian market and believe this is a bubble, I have always asked one simple question—are you willing to short Nifty at this level for next 10 years? So far, I haven't met anyone who is interested in taking my proposal.

Nilesh Shah: It is always difficult to predict the market in the short term. In March 2020, how many people would have predicted that the Nifty will be trading at 25,000 or 24,000? In . hindsight, it is always easy to say, oh, this is the yen carry trade reversal. This is geopolitics. This is US recession. But trust me, more people have lost money waiting for corrections than actually in the correction.

All we are saying is that one, market is optimistic about the future for the right reasons. Second, valuations in many cases are reasonably well ahead. And third, please moderate return expectation and invest with a longer term horizon.

Nilesh Shah: So, undoubtedly, asset allocators will try to sell what is expensive and buy what is cheaper. There will undoubtedly be those movements. Now, if we look at India's position, my feeling is that investors will look to buy into corrections.

Let's look at it from a foreigner's point of view. The foreigners are today either equal weight India or marginal underweight India. There is a reasonably good chance that India's weightage in the MSCI Emerging Market Index will go up. This will make many foreigners underinvested in India. Can they afford to remain underinvested in a growth market like India? The answer is, undoubtedly no.

So they will be using corrections as an opportunity to invest. In every single IPO coming out of India, OFS coming out of India, we are seeing foreigners looking to buy and compete with mutual funds aggressively.

Now let's look at domestic investors—Insurance, mutual funds, pension funds. We all will be buyers of India's growth story. Let's look at retail and HNIs. People, who are expressing bearishness in the market, are ultimately looking to buy at correction. So overall, my feeling is that corrections will be bought into.

This time, investors have also become mature. This is a real life Lagaan movie being played out. As you know, in the Lagaan movie, the local team defeated foreigners. In Covid time, we saw a one day international being played out, where foreigners were selling for March, April, May, June, July 2020. They sold close to Rs 70,000–80,000 crore cash equity. Retailers via mutual funds, kept on buying.

Then, the foreigners realised that Lagaan mein jeetna mushkil hai. So they started playing a test match. From Oct. 21 to June 22, they sold Rs 2,50,000 crore worth of equity. Retailers kept on buying, slowly and steadily. Finally, foreigners realise that retailers are going to win test matches also. So they gave up on the test match format and came into T20 format. On the election result day, they played like T20 and sold about Rs 21,000 crore in cash and about Rs 7,000–8,000 crore in futures. Retailers bought into that too.

So my feeling is that there is a real life Lagaan being played between domestic investors and global investors, and everyone will be looking to buy into correction. Now, someone may buy 10% correction, someone may buy a 20% correction, but every correction will be bought into by local and global investors.

Nilesh Shah: Undoubtedly, mutual funds have a set allocation and balance advantage product, which can buy whenever market dips. The SIP flows have been very strong, and there is also new money coming in from retail and HNI investors whenever there is a correction. So there is a reasonable amount of depth in the Indian market.

Our fundamentals are good, our governance standards are good, and we provide one of the best opportunities on a price-to-earnings growth basis in emerging markets. Now, gold doesn't come cheap. You have to pay the price of gold to buy gold, and which is where Indian markets are trading at premium valuation to others. But that doesn't mean that our markets cannot go down. Of course, they'll go up and down like any other market.

Nilesh Shah: You hit the nail. Value is what you get, and price is what you pay. This is the market where you focus on quality over momentum. This is the market where you focus on reasonable valuation over expensive valuation. This is the market where you focus on diversified ownership and market-discovered prices than low-floating stock, concentrated holding and market manipulated prices, rather than market-discovered prices.

Now in many stocks, holdings are concentrated in a few hands because there is very, very low-floating stock. This is resulting in valuations which are way ahead of their fundamentals and puts tremendous pressure on companies to deliver growth, which is well beyond their capacity, in our opinion.

Now, will these stocks correct today or tomorrow? I don't know. Will they correct when supply emerges, when minimum public shareholding norms are enforced, when some of the promoters of these companies realise that my shares have really run up and let me book some profit? Be the case as it may be, whenever supply emerges, the stocks are likely to fall quite sharply. Hence, focus on quality over momentum, high-floating stock market discovered prices versus low-floating stock and concentrated holding, and focus on reasonable valuation over expensive valuation. Do remember—price is what you pay, and value is what you get.

Nilesh Shah: So, today, if we look at large caps, maybe 70–80% of large caps fall in that bucket. If we look at mid caps, maybe the ratio is 50-50. Small cap ratio reverses to maybe 30-70.

So there is opportunity in all baskets—small, mid and large. There are some stocks across private banks, technology, chemical and consumer discretionary, where valuations are still reasonable, below or around their historical averages. Growth looks fine. Hence, one can look to invest from a valuation point of view. It does not necessarily mean that they will start outperforming the market from tomorrow onwards.

Unless and until supply emerges, it is unlikely that low-floating stock counters will correct. Their prices can rise even further, but eventually they will correct. Hence, for an investor, it is a trade where you keep on reducing your holding in low-floating stocks, expensive valuation stocks, and try to buy high-floating stock and reasonably valued counters.

Nilesh Shah: FMCG companies cannot take their business for granted. They have to keep on investing in the brand. Their brand should remain relevant for the new sets of consumers that are coming in. Most importantly, they have to invest in distribution.

Just to give you a small example, under the Pradhan Mantri Gram Sadak Yojana, rural connectivity has gone up substantially. There were, let's say, old FMCG companies, which were serving mainly urban India and semi-urban India, but not rural India because of lack of connectivity. When this Gram Sadak Yojana started building connectivity, they probably didn't move with that time, and that allowed the emergence of many FMCG companies which are leveraging rural road connectivity to capture the rural market.

Now, this requires different skill sets of distribution, but people who are early movers in capturing the rural market are witnessing growth. So we have seen product categories where, in a couple of states these kind of companies are able to sell what established companies sell all over India because of their connectivity, because of their penetration. So my limited point is that, yes, FMCG looks good. Elections have put money in the pockets of consumers. Budget is spending on skills and apprenticeship allowances, and there is also a likelihood of a good monsoon. All these things will put money in the pockets of rural consumers, and that should satisfy and work well for consumer discretionary companies.

Nilesh Shah: How many people were talking about yen carry reversal 10 days back? It was unknown. It came and hit and today, everyone is giving gyan on yen carry trade reversal.

All I am saying is that let's bow to the might of the market. It is well beyond any individual. We have to just focus on how we react to the correction. Every correction provides an opportunity to participate in the long-term India growth story. The choice is yours. Do you want to be a trader going up and down with daily swings, or do you want to be an investor using every correction as an opportunity to buy.