We are talking to you at a time when you look here, look there, look down, look up, everything seems to be at an all-time high. Gold, silver, US equities, Indian equities, NAV of Kotak Mutual Funds, everything is at an all-time high.
Nilesh Shah: Yes, we are in a Goldilocks scenario where courtesy central banks printing money over the years have created a scenario where all asset classes are nearly all-time high.
They say too much of good news and too much of happy days do not last for long. So, is this like a dream and we would be shaking up or this is going to be long dream which will keep us happy for next few years.
Nilesh Shah: So, difficult to say in a very uncertain geopolitical environment. If we see all around us, events are happening at a pace and a scale which is very-very difficult to figure out. There is no way we can position our portfolio for every global event happening. If we take a longer-term view, the drivers for different asset classes are totally different. Gold is going up because central banks are buying gold to diversify their dollar reserves.
Indian equity markets are going up because compared to other emerging markets, we look far better. Our earnings growth over next three-five years is likely to be in high single digit, low double digit. So, my recommendation is that if you are taking a longer-term view, then yes, there is no need to worry about this volatility. There will be nightmares. But if you sleep throughout, then you will have a happy ending, you will have a happy sleep.
Absolutely and I guess one does not have to wait too long for the first litmus test, at least the earnings are soon going to be knocking on the corners. But where is it that you are anticipating pockets of outperformance this earning season and where do you think underperformance is going to persist?
Nilesh Shah: So, purely from expectation point of view, we believe some of the midcap IT companies will be able to outperform expectations. Now, please do not confuse numbers with the expectation. If a bad number is factored in and you deliver better than that, it will still be outperformance. Consumer discretionary, consumer durable is one space where we could see against earnings beating expectations. Banking and financial services on a selective basis we should see earnings beating expectations. The disappointment probably is going to happen more on a stock specific thing rather than sector specific thing. Albeit real estate seems to be slowing down. The top end of the real estate is still continuing, but the mid and bottom end seems to be slowing down. So, there could be some earnings disappointment over there. Correlated to that sectors which are very-very competitive, for example, paints there could be earnings disappointment.
Commodities on a higher base may deliver slightly lower than expected earnings. So, it is not likely to be large outperformance, large underperformance. It is likely to be rangebound earnings.
But earnings is one key thing that the markets will be watching out for, but other than that 9th of July that is the deadline for the tariff that Donald Trump has set and everybody is watching out for that. Give us some sense that how do you see the markets approaching this particular deadline because it is not just the Indian markets that are doing well, but US markets they also sitting at an all-time high levels. Do you believe that some nervousness can kick in as we approach that date?
Nilesh Shah: So, it is very difficult to figure out what Mr Trump is up to. Don ko samajhna mushkil hi nahin, namumkin bhi hai. And markets by now would have surrendered, will rather wait for announcements and then react, then actually start expecting and then reacting. In some sense, baagh aaya, baagh aaya story is getting repeated. Time and again the backtracking of announcements, backtracking of steps announced is probably convincing markets that it is better to react once steps are announced rather than in anticipation of the same.
But also just wanted to have your take on back home. When it comes to the Indian markets, you have given your take on IT as well as BFSI. But what about some of the other sectors wherein because of this whole tariff chatter, some of the export related sectors, be it speciality chemicals, pharma, these were actually beaten down names back then. Do you believe now is the time to once again look forward to those counters, any valuation comfort wherein you find in some of these export related sectors.
Nilesh Shah: So, I believe both chemical and pharma are sector to accumulate. On the chemical side, we had capacities and we had capabilities. The Chinese competition was hurting our margin and which is why operating leverage went against chemical sector. Now with tariffs, China plus one coming into play, our chemical companies’ capacity utilization is going up. Operating leverage is coming back and suddenly they are able to deliver better than expected result. We saw that in March 25 quarter.
We expect that to continue in June 25 and onwards quarter. In terms of pharma, Indian generic pharma provides about 40% of generic drugs consumed by Americans and that cost them about 10% of their medical budget. So, undoubtedly, it is a very-very cheap provision. We have seen that in some of the critical generic medicines, stock levels are running low and clearly US would not like to disturb that equilibrium.
More importantly on this generic medicines because there is oligopoly in US distribution, a large portion of profit is kept by the distributors rather than the manufacturers. Even if there will be levy of tariff which we believe is not the front case, the distribution margin will be hurt far more than the manufacturing margin. Overall, we still believe Indian pharma companies is an opportunity to accumulate just like chemical sector.
