Indian markets are reasonably priced, focus on asset allocation says, Nilesh Shah of Kotak Mutual Fund

The Indian markets are going through a phase that the investors have not experienced in the past five years. Nilesh Shah, MD, Kotak Mutual Fund, shares his insights and wisdom through his decades of experience to help investors get clarity and how to deal with the current scenario.

Speaking exclusively with Upstox news, Nilesh Shah shared insights on how to look at the current market scenario, FII exodus and what investors should do in this type of market.

To give a cricket analogy, investors have to score runs irrespective of the pitch and the bowler. At times, a batting pitch helps score runs. At times, a bowling pitch makes it difficult to score runs. Our job is to spend time on the pitch and play the ball on merit. Markets are unpredictable. For a long-term investor, there is always an opportunity to make money in any market.

Did we give exit to FPIs selling relentlessly over the years at a higher price? Would FPIs have sold at a lower price? Will they come to buy? If yes, what will be their entry prices?

Since FPIs are underweight, will they campaign to unnerve DIIs?

Will the DIIs campaign to unnerve FPIs? Will FPIs have a FOMO?

Will retail investors withstand higher volatility and negative returns in the short term and moderate returns in the long term?

There are many questions but very few answers.

The only thing we should focus on is for India Inc. to deliver on the 2G of Growth and Governance like the last decade (the third G of Green is on the back foot). We must sustainably outperform our peers in earnings growth, ROE and governance. FPIs will come back when they find a favourable risk-return ratio.

There are many factors at work. Flows, fundamentals and sentiment drive markets. The stagnation phase is driven by buying flows matching selling flows in aggression. It is like a relentless rally in a table tennis match. Both players are playing intensely and are unwilling to give an inch. Sentiment is adversely impacted by geopolitical uncertainty and the levy of tariffs by the US. Since further market rating isn’t impossible, earnings growth will drive market returns. Earning growth is likely to be in high single digits. Putting all these things together, we are seeing a range-bound market.

Undoubtedly, markets have witnessed many phases of consolidation, correction, and recovery. Like a full moon (poonam) after a new moon (amavas), the market moves from correction to recovery.

The market doesn’t give returns on a linear basis. Earnings and valuations drive market returns. Valuation is a function of discounting the future. If the future looks bright, valuations will likely be higher, and vice versa. We have seen equity market returns over the last year in the low single digits as earnings have moderated and valuations have marginally derated.

Investors must focus on their asset allocation. Trying to predict the future is futile. A better strategy will be to take advantage of the situation through appropriate allocation. Our equity markets are reasonably priced. Maintain neutral allocation to equity. Keep cash to take advantage of any correction. Buy good quality companies at reasonable valuations. If you don’t understand asset allocation or have time, consider asset allocation funds for long-term investment. Such funds bring private banking services to the retail investor. The fund manager will take asset allocation calls based on market valuation between debt, equity and precious metals.