No need to panic, over medium term, India to become a standout destination: Nilesh Shah, Envision Capital

Nilesh Shah, MD & CEO, Envision Capital, says India is heading towards lower inflation which is going to encourage the Reserve Bank of India to keep cutting interest rates over a period of time and that he thinks is a very, very strong booster dose for our economy. India is way more sensitive to crude oil prices, to liquidity, to interest rates versus maybe many of the global developed economies. So, the two situations, two scenarios that are unfolding are very different. In the short term, we would still be very correlated, we probably move in the same direction, but probably over the medium term, India will emerge to be pretty much a standout destination.

FIIs were selling because the dollar was strengthening and yields were going up. Right now, yields have gone to four-and-a-half because inflation fear is back. How does one look at these moving parts in the world, at this global macro interplay, which will have an impact of 5% to 10% in the near term?
Nilesh Shah: It will undoubtedly have an impact. But inflation in the United States is led less by crude. Inflation in the United States is more led by consumer spending. Their sensitivity to crude oil prices is a lot less versus the kind of sensitivity which a country like India has because we import probably 80-85% of our energy requirement. So, to that extent, I probably think that while inflation in the United States, unless the United States slips into a recession, which is a possibility, then probably we will see yields soften along with fall in broader prices across a basket of goods and services.

Versus that, India seems to be in a really soft space. The crude correction, correction in a lot of metal prices, all of that augurs well from our inflation point of view. And keep in mind that our central bank has kept interest rates relatively higher for a very long period of time. I mean, for a couple of years, at least it was in a pause mode.

My view is that we are heading towards lower inflation, that is going to basically encourage the Reserve Bank of India over a period of time to keep cutting interest rates and to me, I see that as a very, very strong booster dose for our economy. So, we are way more sensitive to crude oil prices, to liquidity, to interest rates versus maybe many of the global developed economies. So, the two situations, two scenarios that are unfolding are very different. In the short term, we would still be very correlated, we probably move in the same direction, but I probably think over the medium term India will emerge to be a pretty much a standout destination.

In these uncertain times, what kind of an asset allocation strategy would you advise?
Nilesh Shah: For the principal protection part of your portfolio, obviously you have to be in fixed income. If interest rates are lower, bond prices go up, there is going to be an appreciation on the fixed income part of it. Maybe it might be a good idea to move if people are holding on to gold, given the sharp run up that we have seen, maybe gold also becomes vulnerable, though it is being touted about as the safe place or the safe haven, but I do not believe so.

For principal protection and those who are really worried about volatility, fixed income might still be a better place. Nevertheless, I would think that equities over the medium to long term have the potential to deliver double digit returns, that has been the case so far. I do not see that changing, given that India’s nominal GDP growth will be about 10%. I would still think that this is a time still to be in equities and maybe use this current bout of correction to keep increasing allocation to equities, depending upon one's own risk appetite.

You have already told us what you like. Tell me what looks like a complete avoid right now.
Nilesh Shah: For now, the tough spots clearly are IT and pharma because they are significantly export-facing sectors. They are hugely dependent upon how the US does and how demand is from the US and on top of that, we have the tariff thing. For now, one has to be very careful and cautious about export-oriented companies or export-oriented sectors. That is one place to avoid in this environment.

I still think the demand for pharma is going to be inelastic. No matter what tariffs are imposed, I do not see why suddenly there is going to be an alternative source for the United States to buy its pharmaceutical requirements irrespective of the tariffs imposed. So, we will live with some uncertainty, maybe in a few weeks, few months now even these two pockets would probably create very attractive buying opportunities.

Metals is something one would avoid right now because again, it is a factor of global demand, global prices, there is really nothing more to metals, so industrial metals is one area that one should be avoiding very-very clearly in this environment. Also, with this correction and maybe a bit of the investor sentiment getting impacted, you are going to see some impact on capital market facing sectors or capital market facing stocks. Maybe that is one area where you want to wait to add to your positions or buy afresh. These are some of the sectors where one has to be cautious right now.

What are you buying and selling?
Nilesh Shah: We are still using these opportunities to buy into some of these digital platforms, and consumer stocks. These are really the pockets where we are buying into.

But you own Angel One. So, am I missing on something or have you sold Angel One?
Nilesh Shah: No, we are still holding Angel One. We still like the medium to long term. The whole wave on the theme of financialization is still in a very nascent stage as far as India is concerned and we believe that some of these platform companies are essentially great executors. They have done a phenomenal job so far. It is just that there are headwinds for them right now, but clearly this time will also pass and maybe a few months from now, they will be back onto the growth trajectory. So, we remain very confident of the long-term potential and the ability of these management to execute.

So can we say Indian investors should not panic, but they should be alert?
Nilesh Shah: I do not think it is time to panic. The big bear markets that we have seen during COVID, that we have seen during the global financial crisis or during 9/11, last for six to nine months. We peaked out about six months ago. Maybe it is a question of another three to six months. It is better to bide the time and be more prepared for the next round of up move. I do not think India's long-term bull market has got impacted in any way.

The long-term bull market still remains. We have really not seen foreign capital come into India in the last three to five years and I am talking of foreign portfolio investors. I am saying this from portfolio investors. I am not referring to FDI. I believe that over the next few years, we are going to see a lot of foreign portfolio investors coming into India. India could end up being a mainstream allocation. So, apart from earnings growth and strong fundamentals for the Indian economy, I also see a new round of liquidity flowing into Indian markets down the line. This is not a time to chicken out. This is not a time to get too worried or definitely or the time to panic. This is really the time to remain constructive and look for the opportunity ahead.