Nivesh Mitr spoke to Nilesh Shah MD Kotak Mutual Fund discussing how 2018 went by and with what expectations should investors enter 2019 –
What are your views on 2018 – the year gone by?
The year gone by was the toughest in terms of making money. Start of the year was marked by high optimism reflected in valuations, which were above the historical average by a margin. Rising oil prices, depreciating Rupee, rising interest rate, default by IL&FS, tight liquidity and FII selling resulted into a crash in small and mid-cap stocks and correction in large-cap stocks. However, among all the gloom, corporate profitability kept on steadily improving.
When everything was looking lost, suddenly oil prices corrected against all expectations. Drop in oil prices brought stability in Rupee and brought back FII flows. OMO’s done by the RBI improved liquidity condition from extremely negative to negative. Drop in inflation and US Fed’s unexpected turn around on future course of Fed rate hike pulled Indian interest rates down by a significant number.
Appointment of professionals to run IL&FS along with timely action by the government to contain NBFC liquidity squeeze has helped the economy regain its growth momentum.
What according to you will be the impact of various structural reforms that India underwent in 2018?
Indian economy is at an interesting stage. Last few years structural reforms like GST implementation, Demonetisation, Insolvency Laws, Transparent Auctioning of Public Resources, Digitisation, Formalization of Economy through expansion of tax base etc. has created short-term pain in terms of disruption and higher compliance cost. The long-term benefits of the same are accruing in the years to come in 2019 and beyond.
What are your views on US-China Trade war and its impact on Indian markets?
There is an exciting opportunity in front of India through US-China tariff war. In the 80s India and China were of similar size. China became manufacturer to the world. We missed the bus. Today China is about six times bigger than India. Due to tariff war, many companies are moving out of China. If India can attract those manufacturers, our exports can take a quantum Jump and we can expand the manufacturing base to create inclusive and faster growth.
Indian economy can move to double-digit growth in years to come due to the structural reforms undertaken in the past. It will require supportive liquidity, smoother transmission of credit and reasonable interest rates. With the RBI on top of inflation, this should be possible. It also requires capturing supply chain disruption unleashed by the US-China tariff war that will expand our manufacturing base.
Indian Economy looks well poised for 2019 and beyond due to low inflation, fairly valued Rupee, under control fiscal and current account deficit and improving the banking system. Obviously, oil price movement will continue to play a crucial role in impacting Indian Economy.
In your opinion what will be the impact of elections on the markets?
In the past two decades, election results have created a material impact on the market on the day of election results.
Over the course of the remaining period, elections don’t make a material impact. The General Election result will impact the market on the result day. The market today is pricing in a stable government which will pursue the path of higher growth.
What are your expectations for 2019?
Market movement tracks corporate profitability trend. Better liquidity, lower real interest rates, fair value currency, smoother credit flow and improving capacity utilization will support higher corporate profitability growth in 2019. The Indian economy, which was running on consumption engine can get a boost from the investment side in 2019.
With the correction in 2018, valuations have become fair. Small and mid-caps look little better valued than large caps.
Domestic flows slowed down in 2018 over 2017 by a significant amount. Hopefully, they will be maintained at the same level in 2019 which will support the market.
FII flows turned negative in 2018. It is difficult to take a call on the FII flows in 2019 as there are conflicting factors. Our weight in MSCI EM Index could be reduced adversely impacting flows. India has outperformed other EMs by a big margin. Our valuation is at a historically high premium to other EMs because of that outperformance. India will be the fastest growing major economy in the world. All these factors will impact FII flows.
From an opportunity point of view, 2018 was an English or Australian Cricket pitch where making run was difficult. 2019 could well turn out to be like an Indian Cricket pitch where making runs might be easier. However, the basic technique of making runs will remain the same.
2019 looks promising for making money. The basic tenet of long-term investment and disciplined investment through asset allocation will hold good for investors.