In January 2015, what started with murmurs got confirmed when it was announced that Mr. Nilesh Shah has joined Kotak AMC as the Managing Director. In his previous assignments, he has held leadership roles with Axis Capital, ICICI Prudential Asset Management Company, Franklin Templeton and ICICI securities.
He shares his vision for Kotak AMC and his views on the market along with the reason why he wrote an open letter to Jim Rogers. (You can read that letter here)
1. What is your vision for Kotak AMC?
We believe that we are in the business of managing trust and confidence of our clients and partners, not just money alone. “Think Investments, Think Kotak” is our group’s motto. My vision is that Kotak Mutual Fund excels in managing the trust of its clients and partners and their investments. We excel in investment management, investor education, client servicing etc. We became part of every Indian’s investment portfolio and help them realize their dreams.
2. Are you making changes to the processes at Kotak AMC? Can you share your insight about some of these changes?
There is a very good American saying, ‘you don’t repair something which is not faulty’. It means what is working should not be changed. Fortunately for me, Kotak Mutual Fund has a solid investment team with a good track record. My role in investment is to ensure that my team follows a disciplined investment process to optimize risk adjusted performance. I can act as a sounding board for my fund managers due to my experience and passion for Investments. The day to day management of the funds is done by fund managers under the able guidance of my colleagues Harsha, Lakshmi and Anshul who are managing equity, fixed income and PMS.
3. You had recently written a rebuttal in a daily newspaper to Jim Rogers. What led you to write the same?
Jim is a well- known personality in India. His opinion can influence many investors. We have a wrong habit of giving disproportionate weightage to what a “gora guru” says. Many a time when a person takes a top down approach or makes a short visit, he does not get the true picture in a complex country like India. If you go to Dharavi, you may feel that India is dirty and poor. If you visit Marine Drive, you may feel that India is clean and rich. The truth lies between these two extremes. It was important to portray correct picture of what is happening in our country to Jim and other Investors so that they continue to participate in the growth story of India.
4. What is your view on the commodity cycle?
Today, the commodity cycle’s bull-run has come to an end as debt funded investment cycle is coming to a halt especially in a country like China and western world. China has consumed more steel in last 10 years than what USA consumed in last 100 years. The vociferous appetite for commodities is coming to a halt as they have built more road than they need and more cities than they require in the near term. As their consumption starts slowing down, capacities created by commodity suppliers are founding fewer takers resulting into softer commodity prices.
But by definition commodities are cyclical. At lower prices uncompetitive capacities shut down and lower overall supplies and support prices. Today we believe that we are in the part of the commodity cycle which is likely to remain soft for some time.
5. Like you mentioned that China is slowing down. Do you have any specific view on China? The view on China as of now are of two types, one who believe China will go bust, this camp has been saying so since 2010 but nothing has happened at the scale being predicted in the last 5 years. The other side is bullish, always pointing how the government is changing and how the new rules will push growth.
I am not an expert on China as I have neither read their companies balance sheets nor met their managements. History suggests that those who were talking about China going bust at some point of time have failed miserably till date. China has created more than $5 trillion market cap in last one year, more than double of our current market cap. According to one research report almost 8 % of China’s free float is funded through margin funding. That shows a mania like 1991 or 2000 of our markets. Common sense suggests that such greed eventually results into pain. We really shouldn’t bother of what is happening in Chinese economy, we should be more bothered about how to keep Indian economy on a healthy ground.
6. The RBI has again announced 25bps cut. Are you looking for further rate cuts?
The RBI has cut repo rate by 25 bps in line with market expectations. However they have raised CPI inflation target from 5.8 % to 6 % by Jan 16 and revised downwards growth target for FY 16 from 7.8 % to 7.6 %. Both markets - equity and debt has reacted as if the RBI has hiked repo rate. The market has failed to read RBI’s targeting of inflation. RBI is targeting CPI Inflation to be 4% over longer period of time. RBI is also targeting a real interest rate of 1.5 %. These leaves room for policy rates to come down from current level of 7.25 % to 5.5 % over longer period of time. This path is dependent upon falling trajectory of Inflation which in turn is dependent upon monsoon and supply side debottlenecking. RBI also has to watch for global factors like US Fed rate hike as Debt FII’s are participants in Indian markets.
7. As an AMC, what is your view on the Federal Reserve Interest rate hike?
We are not expert on US economy. We try to read what US fed futures are pricing in to get a better view on US Fed’s action. At current level our analysis suggests that Fed Futures are pricing in hike around September 15. We are watching falling unemployment rate along with the average hourly wage rate. Our analysis suggests that increase in average hourly wage rate above $3 per hour would prompt Fed to hike rates. Mr. Fisher, one of the Fed Member mentioned that Fed rate hike will be creeping and crawling rather than shooting up. It will be fair to assume that fed rate hike would be gradual and is reasonably priced in by the market. The spread between US 10 year and Indian 10 year has averaged about 400 bps over last 20 years. Currently the spread is hovering at more than 550 bps and hence we are sufficiently cushioned against the Fed rate hike.
8. What is the biggest trend that you see in India in the mutual fund industry? For example it is often stated that to reach to the masses India needs many distributors but their numbers are shrinking day-by-day.
Mutual Fund Industry will benefit from the big wave of shift in physical savings to financial savings. Indians today save about 60% in physical savings like real estate and gold and 40% in financial savings like Bank deposits and mutual funds. Real estate and gold has under-performed Equity over last 3-4 years. Retail investors portfolio is invested about US $10-12 tn in real estate; US $1-2 tn in gold; US $2-2.5 tn in fixed income instruments and US $300 bn in equity, including equity mutual funds. This under-performance along with already higher allocation to physical assets will push Indians to save more in financial instruments.
Distribution set up is most critical part for mutual funds to reach to investors. We need to ensure that the distributors are adequately educated and incentivized to sell mutual funds. If one sells a real estate, the commission is between 2 - 5 % and many a times real estate investment is a leveraged transaction, through loan. If one looks at insurance, the incentives are much higher than mutual funds. If one sells gold then the incentives are much higher than mutual funds. We need to ensure that distributors are financially incentivised to sell mutual funds.
The second thing is that we have to empower distributors through knowledge. Markets are volatile and Investors become restless with volatility. We need to educate distributors so that they can serve their customer well and make them long term investors. We need to ensure that every distributor achieves the status of a professional like a doctor or a chartered accountant with the investors.
At Kotak Mutual Fund we are working on empowering our distributors through our communication, training and engagements.
9. Are you planning any product launches? Which categories do you plan to focus on?
There are certain product categories like close ended equity funds, capital protected funds, hybrid funds which we have not explored earlier. This product makes imminent sense for our clients. We will launch those products over next few quarters. We begin by raising a close-ended equity fund in the month of March 15. At Kotak Mutual Fund our philosophy is that funds are like our kids. We will not raise more than what we can afford to manage. We are not in the business of having multiple funds and follow different strategy so that few funds will do well whereas others will suffer. In that strategy we will lose confidence of our clients.
10. Do you plan to merge any schemes?
We don’t have any over-lapping schemes. When we bought Pine Bridge, we ensured that there was no overlapping by merging similar schemes.
In fact there is one point I would like to stress. Today there are newer fund houses that have to follow certain rules or regime from an asset allocation point of view for their funds which older player doesn’t have to follow. This arbitrage is creating a non-level playing field. For e.g. in our short-term fund SEBI has put a 3-yr duration cap. But many of my peers have no such caps on the maturity. Like in liquid funds where SEBI came out with a regulation saying that no matter what your offer document allows, all funds have to have less than 90 days maturity to qualify as liquid fund. SEBI should define similar rules for other categories too to ensure that funds compete on same level playing field. Likewise If Fund houses wants to categorise schemes as liquid plus- the maturity cap should be six months, if they want to categorise schemes as ultra-short term- the maturity cap should be 18 months, for short-term funds perhaps up to 3 years.
Today many fund houses have multiple schemes in same categories and they follow different investment strategies. If you have differentiated strategies then one scheme will always do better vis-à-vis the other. This results into unfair impression in the minds of investors and distributors.
11. Views on the banking sector?
Today PSU banks are facing three problems. The first is lack of talent. I regularly ask the senior management of PSBs (Public Sector Banks) if they are encouraging their children to join the PSB. Majority of the time the categorical answer is no. They are going abroad, joining IT sector or private sector banks but very few are joining PSBs. So clearly they have a problem in attracting talent.
Second is the lack of capital. For banks to sustain growth and meet Basel III capital adequacy norms, lot of capital is required. If government is not going to dilute below 51%, there is going to be a limitation in terms of availability of capital.
The third, is the decision making process. Clearly, in the past, the PSBs decision making process has been influenced by non-banking considerations and that has resulted in huge NPA baggage. Until the market is convinced that there will be no fresh NPAs and that you will be able to recover NPAs, I don’t see how PSBs will be able to regain the confidence of investors. Majority of them are trading below their book value. It shows what market believes that fair book value to be.
At the same time we see this financial wave where investors will be switching from physical assets to financial assets, and we believe the private sector banks are well positioned to benefit at this point in time.
In this quarter the profit of private banks surpassed that of PSBs. Though the PSBs own 75% of the banking balance sheet, their profit share is less than 50% which reflects the problems plaguing the PSBs.
12. Which sectors where you believe the price has not factored its true potential?
There are domestic cyclicals where growth has not been fully priced. So you have cement, where we believe that as the government gives order for building road and they have already given 10 mn tonnes of cement order across 200 plants all over India that should result in better capacity utilisation and higher profits. Similarly there are other sectors too where the operating leverage is not fully taken into account.
13. Which are the sectors you are bearish on?
Sectors like Real Estate are avoidable due to governance issues. Metals are avoidable due to global slowdown. Leveraged Companies are avoidable due to the quantum as well as rapid erosion in equity value with high interest rates.
14. From Jan 29, 2015 levels the Stock markets have witnessed a drop of 10%. Do you see a further drop in the performance of the stock market?
It is always difficult to predict the short-term trend in the market. As of today the momentum of the market does suggest that the market is in a correction cum consolidation phase. And one can never be sure where the bottom will be.
15. The RBI has raised concerns and the forecast by the IMD is also of below normal monsoon. Will this have a huge effect on the stock market?
Let’s put monsoon in perspective. Agriculture as a whole is about 18% of the Indian economy. In that there is Kharif crops and Rabi crops, if we assume that both of them to be equal, about 9% of Indian economy is impacted directly by the monsoon. Obviously there can be some indirect impact like in the form of low-hydro power generation, so on and so forth. But effectively it is 9% of GDP that will get affected by monsoon.
16. So you see a mild effect of the low monsoon on the whole?
This year the monsoon is expected to be at 80% of normal average, this is exactly like last year. Last year also we had below normal monsoon, and this year also we will have below normal monsoon. Like last year we will witness the same level of rain.
There is also another agency called Skymet Weather Services, and the accuracy of this agency is as good as that of the IMD, is still predicting a normal monsoon. So the final verdict is not yet out over monsoon. This is more of an opinion on monsoon.
Also it is important to understand that a bad monsoon may not necessarily mean that the inflation will rise or low GDP growth. In the past there has been, many instance, where the greater government responses has resulted in low inflation and high growth.
Therefore, my assessment is that the jury is not as yet out on the monsoon. We could be surprised at monsoon.
17. In the last one year at least there have been multiple occasions when stock market has moved in either direction by more than 5% in a span of a month. Based on your experience is such volatility a new phenomenon? How should investors deal with it?
The volatility is not a new thing. We have seen periods of massive corrections in 1991, 2000, 2008, etc. I think the volatility that I saw in mid-2008 was far more than what I had ever seen in my life.
Investors should remember that s/he is an investor and not a trader. Volatility per se does not impact an investor, it is the action taken by the investor during volatility which impacts him. So for example, an investor has invested at 18,000 or 20,000 level and then has been doing an SIP. Then even at current level of market, you have made decent money. You should not worry about what is happening on a day-to-day basis. Focus on buying stocks, building portfolio for a longer period of time.
18. By when do you think there will be more clarity on the performance of the stock market?
Why have the markets corrected? The markets have corrected because the second half of 2015 corporate earnings has not been upto the expectations. We need to ensure, that if the corporate earnings of the corporate picks-up then the market will pick up on its own. The first sign the markets will look forward to could be earnings recovery by corporate India. The second thing that markets will consider is the fear of US Federal Reserve rate hike. We believe there is no rate hike in June and in the month of September there is a potential of rate hike and the markets would like to see and watch, what US commentary is on the question of future rate hike. If its deference then our market will benefit. If they do not defer then perhaps our market will witness some amount of volatility. The third thing which markets will be looking forward to would be monsoon, which we will get to know in the next two months as to where it has spread and what has it has done to the Indian economy.
19. So probably by September or October there will be more clarity on the direction of the markets?
The markets in September and October will have new reasons to worry. Maybe by then the oil prices would have gone up or rupee would have become more volatile. I don’t think you can invest in stock markets with clarity in mind. In stock markets you have to invest by assuming if the risk is worth taking or not. Today, from a monsoon point of view we think that monsoons can be managed through appropriate government responses, we believe that the Federal Reserve rate hike cycle will not be excessive. The corporate earnings could recover in the next few quarters. Putting all of this together we think the correction phase is a great opportunity for investors to keep buying in the stocks that you like.
P.S. This is the submission draft. The actual story had appeared in July 6, 2015 issue of India Today as part of Smart Money Section. To read the final version. Click here or copy paste the given below link -
http://indiatoday.intoday.in/story/investor-stock-markets-equities-nilesh-shah-interview/1/447097.html
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