Nilesh Shah Stock Portfolio: Has the bear market begun? Nilesh Shah’s tips for portfolio allocation

“People who are under invested in equity should take advantage of this correction and start reaching equal weight to equity. This is a market where it can move in either direction up or down,” he says nilesh shahMD, Kotak AMC.

Why is there panic in US equity markets? I understand why India may be falling because there was an out of turn policy. Suddenly one heard the governor getting extremely worried about inflation but why is the US, considering that Fed played on expected lines and the markets actually jumped up on the day of the Fed decision?
Markets are always wiser. In the US, inflation is higher than India, they are now just about to reverse their fiscal and monetary stimulus. We reversed that long back. Today there are multiple factors which are pulling investors in different directions. The first is the Russia-Ukraine situation, whether it is stalemate or whether it will result in higher escalation, one does not know.

The second thing is the bond route which is happening globally. Inflation has remained high globally and significantly higher than emerging markets in the developed world. Emerging market banks have started taking action much earlier. Developed banks were pretty late. Their fiscal stimulus was high and many loss-making companies whose capital model was through bond capital, were getting very high valuation. So a confluence of a lot of events have happened. If I have to use just one line – easy money and ample money both are going away and in a falling tide, we are all trying to realize which one is not the fundamental boat.

What happens from here? Do you begin to challenge whether the bull market is intact or not? On a net basis, it is not that we have not seen days like these; we have seen worse in 2020 when Covid struck or many before that as well. But will inflation and macro factors – make you worry about the longevity of this bull run?
In every bear market, seeds of bull markets are sown. Today, American companies like Apple, Google, Microsoft, Netflix, Facebook are available at between 15 and 30 times one year forward PE. They all have significantly corrected in terms of valuations. Even a new age company like Tesla has corrected and their earnings have picked up.

Clearly there will be one set of companies which are doing well where valuations are reasonable and in that portfolio, the bull market will begin over a period of time when some of this uncertainty is behind us. On the other hand, there are companies and I quote from a tweet which I got on whatsapp “one mention that the stock has fallen 94%, so it is a great buy, there is a possibility that stock can bounce back. Your downside is only 6%.” Then someone corrected saying that “bhaiya 6% is not the downside, you can still lose 94% from here.” Despite giving this message, the other person replied back saying “you have to pay the price for someone to buy my shares, how can a stock go down 188%.”

Now this kind of illogic irrationality is also present in the market despite this correction and in that kind of portfolio with that kind of investors. I think the bear market has just begun. There is still more downside over there and so this will be the market of stock pickers. If you are smart and rational, you will be able to build a portfolio of good companies available at decent valuations and make money.

What happens now because what one has seen of late is neither growth nor value has been spared?
Having said that, growth clearly is getting challenged and value has been somewhat resilient as opposed to the growth story. Do you go by prognosis at all where you bet on value and not as much growth?

I humbly submit myself to the market today. This is not the market where one can take a definitive call because events will shape the direction of the market. If we look at employment data and the inflation in the US, the Fed rate should go higher than what is discounted by the market. But in the first quarter GDP number which showed minus 1.4%, GDP growth will have a few more quarters of negative growth. Will the Fed have the ability to raise interest rates despite employment and inflation data? Who knows?

Oil prices can go higher from current levels if there is further escalation in the Russia-Ukraine situation or oil prices can crash big time if Iranian and Venezuelan oil starts flooding the market. The same thing is possible in the Indian scenario. Our inflation could go higher or with the oil scenario globally and good monsoon, it can top off significantly. In this kind of scenario, where it is not possible to predict how the future will shape up, it is most important to submit to the market and wait for events to play out.

When it is raining, you still need to cover yourself with an umbrella or a raincoat. What umbrella or raincoat is available? These are good quality companies, companies where businesses are real and valuations are reasonable. Stay with these companies. You will get hit undoubtedly but it will be far lower and bearable and eventually when the storm ends, when there will be some clarity and one will still be able to capture the upside.

Build this fantastic portfolio for our viewers. I am only talking about sectors here because what one needs right now is a macro shock-proof portfolio. IT could be that one hiding place but clearly even IT has failed because of the frothy valuations. So where do you find comfort in this market and where would you tactically place higher bets?
It is a far more bottom-up market than top-down. You want to be with companies where management is good and businesses are real. Today unfortunately in the market, there are many businesses which are not real and are still getting much higher valuation.

The second point will be the valuation. Today there are many good businesses which are available at expensive valuations and one will have to be careful but keep these two things in mind. Good businesses are run by good managers and available at reasonable valuations.

One can build portfolios in largecap IT, pharma, industrials and capital goods and top end private banks. This portfolio should protect you on the downside. It will fall, it will give negative returns but probably much lesser than the market and definitely far lower than that portfolio where valuations are unreasonable. Over a period of time, this portfolio will outperform the market on the upside.

What are you penciling in when it comes to capital goods and even within the space, are you just cherry picking and sticking to the largecap names or is it a blanket call across capital goods?
On the capital goods, industrial side, our bullishness comes from a couple of reasons; one, locally the government spending will be higher on capex like last couple of years so that growth will continue to support industrials and capital goods in areas like road construction, water and so on.

Second, there are certain private sector industries where the capital expenditure cycle has begun; steel, sugar, renewable energy are the places where we believe the capital expenditure cycle is picking up.

Even in areas like coal, thanks to the current situation, we believe the capital expenditure cycle will begin. So government spending will get complimented by some sort of capital spending by the private sector.

And the third opportunity is on the export side. Globally many governments have rolled out fiscal stimulus. Like our government, they are also spending on creating infrastructure. Companies who are catering to the export market or who have parents who are present in the exports market and can outsource some order over here.

So, these three combinations of local government spending, global outsourcing and private capex rising– put together will support industrial revival. Obviously this will be choppy movement. It would not be a straight line kind of movement but if you build a portfolio of industrial companies at intermediate level, over a period of time, that should be an outperformer. Some of the results as you mentioned have been encouraging and testifying that our hypothesis is in the right direction


What is your advice for retail investors by way of portfolio allocation in terms of debt and equity?
Let us say there are three kinds of retail investors; one, who is overinvested into equity, looking at the performance since March 2020. My request will be even at this stage, please cut your positions. This is not the market where you should be leveraged into a market where you should be running at trading positions beyond your means. You should not be into futures and options kind of leveraged trading positions. Even in investment, one should not be over allocated to equity beyond your risk profile in this kind of market. There are too many uncertainties.

People who are equally invested in equity should continue their SIPs and if the market corrects further from here, where valuations go below historical averages, then they should start increasing their allocation to equity in a gradual calibrated manner.

People who are under invested in equity should take advantage of this correction and start reaching equal weight to equity. This is a market where it can move in either direction up or down. There are lots of challenges in the near term thanks to the Russia-Ukraine War, oil, US Fed, Indian interest rate and inflation scenario and hence we should take advantage of the correction to be equal weight to this market if you are under invested. Do not look at the market situation, look at your portfolio, look at your investment objective and then take a call.

Is LIC going to be one of those must haves in every portfolio, a long term story?
Undoubtedly there is under penetration of insurance in India. LIC is a brand which connects with every Indian. Now they have become a listed company. It is a journey from being an unlisted company to a listed company and becoming a torchbearer of the Indian capital market, It puts enormous responsibility on their shoulders and I am sure they will be able to discharge it to the fullest extent possible.

While it is important to know what to invest in, it is also important to know what not to touch in this current market environment. You have given us your buy list, what is the avoid list now?
Clearly we are avoiding all those companies where we believe valuations are unreasonable. There are stocks where floating stock is limited or there is concentrated holding and hence valuations are way above what one will deem reasonable. In an era where ample money and easy money or cheap money is going away, all these citadels can come crashing down once the market supply emerges. So we are trying to be with companies where valuations are reasonable and avoiding companies where valuations are excessive.


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