Amid fears of a possible US recession, discussions of Federal Reserve rate cuts and fluctuations in corporate earnings, Shah stressed the need to temper expectations and prioritise quality over momentum in investment decisions.
“Historically, we have faced challenges due to negative returns. My concern now is that we may struggle because returns may not meet expectations. Investors usually expect 20-40% returns as a given, but I doubt the market can deliver such returns. This time, it is crucial to temper return expectations. Opt for quality stocks over momentum stocks, choose high-float stocks with market-discovered prices over those with concentrated holdings and low float. Also, prefer reasonable valuations over exorbitant ones,” Shah advised.
On possible market corrections, Shah said global factors such as the US economic outlook and the unwinding of yen and yuan carry trades could contribute to the declines.
However, he believes any correction is likely to be mild, similar to market performance between October 2021 and June 2022, rather than the severe declines seen during crises such as COVID-19.
Shah sees these potential corrections as opportunities for astute investors and recommends focusing on fundamentals, liquidity and sentiment rather than panicking.
Transcript of the interview
Q: With recent volatility despite market highs, what is your outlook? August has seen fears of a US recession, rate cuts by the Federal Reserve, problems with the yen carry trade and fluctuations in corporate earnings. How do you view the current situation?
Shah: Traders have plenty to worry about. Investors who can stomach some correction need not worry. The growth story in India continues, though profitability expectations should moderate.
Historically, we have been plagued by negative returns. This time, the problem could be that returns are below expectations. Investors expecting 20-40% returns should adjust their expectations. Focus on quality stocks rather than momentum stocks, high float stocks rather than low float stocks, and reasonable valuations rather than excessively high ones.
Q: Could return disappointments trigger market corrections, given the strong long-term growth trajectory of Indian equities?
Shah: There are multiple factors that could trigger corrections, including global issues such as US economic conditions and the yen-yuan divestment. Based on fundamentals, liquidity and sentiment, we expect corrections to be mild rather than severe, similar to the minor corrections seen between October 2021 and June 2022. These could be good investment opportunities.
Q: What is your view on the SME sector, especially in light of recent high-profile IPOs?
Shah: The SME index has performed remarkably well, with a compound return of 66% over the past decade. However, the fundamentals of many companies may not justify current valuations. While the SME index has delivered impressive returns, not all companies will meet investors’ expectations at these valuations.
Q: How should investors approach the current market environment with high liquidity and strong SIP inflows?
Shah: We are following a strategy of focusing on quality rather than momentum and high float stocks rather than low float stocks. We have shifted some investments from defence and infrastructure stocks to technology companies leveraging AI and fast moving consumer goods stocks due to favourable economic conditions. We are also keeping an eye on the chemicals sector and private sector banks for potential opportunities.
Q: Maneesh Dangi of Mosaic Asset Management mentioned a potential contradiction between falling interest rates and expected earnings growth. What is your view?
Shah: Jerome Powell’s ability to manage both bond market expectations and stock market growth is crucial. If he can ensure that inflation declines without triggering a recession, both markets could be satisfied. Historically, central bankers have been successful in balancing these conflicting expectations.
Q: What is your view on the recent SIP flows and apparent discrepancies?
Shah: Gross SIP inflows are about Rs 23,000 crore per month. Net inflows, after taking into account redemptions, are around Rs 7,000-8,000 crore. If a SIP payment fails due to insufficient funds, it is not accounted for in the gross SIP figures. Gross SIP reflects the money credited to mutual fund accounts, while net SIP is gross SIP less redemptions.
Q: Which is a better indicator, Gross SIP or Net SIP?
Shah: Both should be considered together, without double counting. Total repayments should include SIP repayments, and gross SIP should reflect total income.
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