‘Markets have priced in a stable government’

Mid-caps and small-caps are still at a premium despite the recent correction, NILESH SHAH, managing director, Kotak Mahindra Asset Management, tells Ashley Coutinho. According to him, there is still room for a downside in momentumdriven micro-, mini- and small-caps. Edited excerpts:

What changes do you foresee for the mutual fund industry as it grows in scale?

The industry has to change its processes to handle the increase in size. They should not change the principles that helped the industry grow to this level. The principle of value addition, which is giving the excess return over benchmark with appropriate transparency, risk management and liquidity, shouldn’t change. The process of educating distributors and clients, increasing client convenience, achieving economies of scale to cut costs, improving disclosure standards and conflict management, and adopting ESG standards in investment are the changes the industry should adapt to manage the increased size.

The regulator has introduced norms for categorisation of schemes. What are your thoughts?

The categorisation of funds was necessary to remove the caste system in mutual funds. There was a non-level playing field between funds due to different asset allocations and different definitions for fund houses. It was necessary to remove special treatment to a select few fund houses. The categorisation has created a common ground to evaluate fund management performance.

What are your plans for 2018? Any new focus area?

We are one of the fastest growing AMCs (asset management companies) in the last three years. We manage more than ~1,550 billion across our local funds, PMS (portfolio management services) and offshore advisory business. We have applied to the regulator for an AIF (alternative investment fund) licence and expect to commence the business in the second half of FY19. We are looking to launch a couple of products in FY19. We have started the Go Digital initiative for our partners and a programme to train them through online modules. We look forward to ramping up our digital presence and educate our partners and clients to manage market volatility.

What is your outlook for the market for the year ahead?

The index is likely to be range-bound. The upside is capped due to elevated oil prices, high real interest rates, credit squeeze, especially for small and micro enterprises, and the uncertainty related to a new government post-2019 elections. The downside is protected due to improving corporate earnings and the expected good monsoon. The large-cap stocks are trading at a little premium to their last 10-year average on a price-tobook basis. Mid-caps and small-caps are still at a premium to their historical average despite the recent correction. We don’t see markets changing their range unless one of the variables gives way. The global factors to watch out are oil prices and the behaviour of foreign portfolio investors towards India amid tariff war and the upcoming national election.

Some believe markets are factoring in a ‘Modi victory’ in the general election. Do you see a reversal in mutual fund flows in case this is proved wrong?

Markets have priced in a stable, reform-oriented government. The retail investors who are investing in mutual funds obviously are pricing that in. We do expect a slowdown in flows if such expectations are not met. Markets will be fine as long as they get a reform-oriented, growth-focused government.

Do Indian markets look overvalued at this stage? What is your view on mid and small-caps as investment bets?

The micro- and mini-cap stocks have taken a huge hit in the last five months. The small-caps have corrected more than the large- and midcaps. Those stocks had run up to momentum and flows. Now their mean is reverting to their fundamentals. We think there is still room for a downside in momentumdriven micro-, mini- and small-caps. The quality smalland mid-caps will bottom out from a valuation point of view after some correction. Quality mid- and small-caps should be accumulated for a portfolio despite the likely volatility.

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