Follow the dharma of asset allocation to survive an uncertain market: Nilesh Shah

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Investors on Dalal Street have been on a rollercoaster ride amid inflation worries and relentless selling by foreign institutional investors. Nilesh Shah, managing director of Kotak Mahindra Asset Management, said the market is witnessing a very interesting tug of war between optimists and pessimists.

In the Russian-Ukrainian situation, the optimist thinks that there will be a political solution because Russia cannot be ignored and subject to sanctions, but the pessimist says that there will be further escalation and this may even lead to higher deaths, Shah said in an interview with ETMarkets.com.

Sharing his outlook, he said this is the market where valuations are fair and in line with historical average valuation. Investors should maintain a neutral or equally weighted asset allocation.

“There could be a further market correction if events do not unfold as optimists expected. Don’t rush, buy all at once and average that time,” he added.

“We don’t have the ability to say which way the markets will go. Be a long-term investor and follow the ‘dharma’ of asset allocation,” the veteran asset manager said.

Speaking of earnings, he said it was now dominated by commodities and cyclical companies. “Currently, many companies are unable to pass on the price increases to consumers. For the June 2022 quarter, revenue will be higher due to inflationary pressures, but margins will be reduced. We maintain Rs 825-875 EPS for Nifty50 companies in FY23,” he said.

“Earnings quality is changing. Earnings used to be dominated by IT, pharmaceuticals, banking and financial services, but now they’re dominated by commodities and cyclical companies like metals. Not only will you need to look at earnings quality , but also the quantum of benefits and with that uncertainty it’s a bit hard to say which way it will go,” he added.

Shah also gave some inspiring examples to motivate young and new Dalal Street stock market investors. “I still vividly remember Anil Kumble wearing a cast and addressing Brian Lara despite being hit by a fast bowler. He had a broken jaw but ended up taking the wicket of Brian Lara at the end. Something similar also happened with Sachin. Tendulkar too,” Shah pointed out.

“Similarly, investors also need to experience losses in the markets. Bull and bear markets are part of the investment journey. Don’t worry about temporary losses and keep investing,” he added.

The market veteran also pointed out that India is trading at a significant premium to its peer group. “We are probably twice as expensive as China, twice as expensive as Brazil, twice as expensive as South Africa and infinitely more expensive for Russia because their markets have corrected. Our ESG ranking, our standards of governance, our environmental and social conscience are significantly better than our peers So we will be trading at a premium, but maintaining today’s premium in the emerging market seems a bit questionable,” he said.

He further added that FII outflows are likely to continue and short-term uncertainties are causing people to withdraw profits from India. However, Shah also believes that India is a
‘lambi race ka ghoda’.

The seasoned expert is bullish on sectors such as large-cap IT, industrials and engineering, banking and financial services. “However, we avoid stocks that are trading at expensive and very cheap valuations. We mainly invest in companies that are trading at a reasonable valuation,” Shah added.

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