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Financials should outperform broader market: Nilesh Shah, Kotak AMC

M-cap or a FII holding wise, India has been discriminated in MSCI weightage, says Shah.

ET Now|
Updated: Mar 19, 2019, 12.19 PM IST
There are a few NBFCs which look attractive after the correction and no one will have to be selective on a bottom-up basis, said Nilesh Shah, MD, Kotak AMC, in an interview with ET Now.

Edited excerpts:

Top Indian officials, led by Sanjeev Sanyal, Principal Economic Adviser in the Ministry of Finance,are in talks with MSCI, to strengthen the country’s case for higher weightage on key gauges after suggested recasts to the matrix had threatened to lower the weighting. Do you think there is a scope for arriving at a solution in midway?

I definitely think there is a scope because fundamentals favour India. If we see China’s market cap at around $7 trillion and ours at $2 trillion. They are 3.5 times bigger than us but their weight in MSCI is about four times bigger. More importantly, they will go to 50% with higher inclusion of their local shares and ultimately it will become almost eight times ratio whereas the market cap is just about 3.5 times.

Of China’s $7 trillion market cap, about 15% is owned by foreigners and so their holding is about a trillion dollar. In our $2.2 trillion, about 20% is held by foreigners and that is $440 billion. Now 440 versus $1 trillion the ratio should be more like two times. So, clearly whichever way we look at it -- market cap or a FII holding -- India has been discriminated in MSCI weightage. It is important to engage proactively with them so that they can understand our viewpoint and we also have to push long-term investors in India to make MSCI see sense.

A lot of developments are expected on this front. Could you also point out about the recent FII sentiments that you have seen in the market? What do you think has changed suddenly? Are markets looking beyond elections?

My guess is a couple of things have combined together to create this FII flow. The first is the change in the Fed’s stance where instead of raising rates, they talked about rates reaching almost neutral level and early indications of potential recession or potential rate cut towards end of this year. That has started pushing investors chasing growth to move from US into other emerging markets.

The second was relative underperformance of India in January and February 2019. Most global markets rallied but India was left behind and that underperformance made India more attractive vis-à-vis other emerging markets. Underperformance as well as reallocation from US to India probably pushed FIIs to look at India.

The third thing also could be related to their confidence that electoral mandate will be for stable government.

Do you think the underperformance of last 14-15 months was too overdone and that is why you saw a sudden rush of FIIs when you saw a little bit of bullish outlook coming in?

Valuation is an art, it is not a science and probably in small and midcap stocks the correction looked little bit overdone but I think large caps were by and large fine though one can also argue that there was very high polarisation in largecaps where nine stocks became very expensive and 41 other stocks were below their historical valuation.

So yes, in pockets of markets small caps, midcaps there was a correction which brought valuation below 10-year historical average price to book but largecaps by and large were fine, probably driven by those nine stocks.

Would you believe that financials is the right theme to play the market at this point of time?

Financials are a large part of the index but within financials you have public sector banks, retail focussed banks, corporate focussed banks, NBFCs and other microfinance and small finance companies.

One will have to choose more of a bottom-up approach rather than top down. There are corporate focussed banks which look attractive today from a risk reward point of view. There are a few NBFCs which look attractive after the correction and no one will have to be selective on a bottom-up basis. But yes, financials should outperform the broader market.

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