As Chief Investment Officer of Kotak Mutual Fund, India’s fifth largest by AUM (close to ₹5 lakh crore), Harsha Upadhyaya offers key insights into the direction of Indian equity markets and their challenges.
He spoke with businessline following a 4 percent drop in Indian benchmark indices last week, marking their worst performance in over two years.
Excerpts:
Should one call time on India’s bull market?
If you look at economic fundamentals, corporate fundamentals, there does not seem to be too many negatives at this point. However, valuations are at high levels. It is a red flag.
Prediction is difficult in terms of exactly when that (end of bull market) will happen. But, valuation is a red flag. Especially, at the broader end of the market. Not so much at the large cap. Large caps have gone broadly in line with earnings. They are not a big risk. So, medium and small caps is where the risk is.
Lower end of the market is more expensive than the market. To that extent, one needs to be overly cautious about it. Right now, no big negative. Yes, there are geopolitical events. There will be volatility and all that. But there is nothing which suggests that market will crack and explode.
What are your thoughts on the Chinese equity markets rebound following the government’s major stimulus last week?
China, if I see, it is like this. I would say, if I must give an analogy, it is like private sector and public sector in India, Public sector has always been extremely attractive on valuation. But, if you look at long-term secular growth, private sector has delivered better. Between India and China, I would say the same thing. China today is at a valuation which is extremely attractive compared to all other markets. But the sustainability of their growth is at risk. That is why they are coming and supporting in terms of policies. However, on the other side, Indian market valuations are expensive. The structural growth continues. We may slow down, but it does not mean that we will go down in terms of our economy. Long-term structural money will still come to India despite rich valuation . India will remain as fastest growing large economy for next couple of years.
So, how is the FPI play focused on India? Do you see more aggressive FPI selling in the Indian equity market?
So, first, I believe we should not focus too much on FPI. Because, if you go back in history, let us say 15 years back, they meant a lot to the Indian equity market because they held almost 25 per cent of our equities. And, in terms of annual flows, there were multiple times that of domestic flows.
Now, things have changed. Indian flows are better than foreign flows. They used to hold 25 per cent while insurance and mutual funds together were about 11 per cent at that time. So, they were double the size of Indian institutions. Today, Indian institutions are at about 18per cent and they are at about 17per cent. That is also balanced.
But, if I go by last one week data, Chinese markets are up by 25per cent. And FPIs are all queuing up there, right?
See, there are a lot of investors in the market who chase returns, right? The moment markets move in a certain direction, they all go there. So, they will continue. That itself will push it for some time. But finally, the fundamentals will come. It is like private sector and public sector analogy. Valuation-wise, China has been attractive and will remain attractive. Whether it’s a sustainable move or not is a serious question. You will very, very sharply get 20-30per cent returns. But then again people will see whether economic growth is stabilising or not. On a structural basis, things are improving or not. If it improves, then they will stay. Otherwise, they will get out again.
Is FPI shift of funds to China the main fear gripping markets or is it the West Asia crisis?
To me the Indian market’s earnings is the topmost (headwind)issue. The other two— FPI shift of funds to China and West Asia crisis — are not within our control in any kind of way. I mean, one, West Asia crisis, at least until now, it has not had a significant impact. But we must keep watching global oil prices. The first real scare will come to global oil. If crude oil, for whatever reason, goes to $90, $100 and stays there, that means there is something bigger cooking in the Middle East that is going to affect everyone in the world. But, until now, it has been amazingly comfortable.
Despite all these geopolitics, India has benefited because of the lower oil prices. So, that is something that we need to watch as far as far as West Asia or Middle East is concerned. The moment you see oil going up to $90, $100, you should worry about Indian markets also and Indian economy.
What about the FPI annual flows?
Flow-wise, Indian flows are much better. Another change that happened is, 8 to 10 years back, there were no categories called dynamic asset allocation in the mutual funds industry. Now, there are equity savings, multi-asset allocation, and balanced allocation. These funds adjust their equity allocation based on valuation. If the market hypothetically falls by 15per cent, all else being equal, valuations will go down, and these funds will come in. Due to this change in market structure, FPIs are no longer as relevant as they were before.
It may bring some jitters to the market. In this calendar year, FIIs have put in $12 billion from January to September, while domestic flows are around $ 30 billion. So, their shift to China will not significantly unsettle the Indian side. It may have a short-term effect, assuming no one else provides support. But Indian flows are more structural. SIPs are also settled. If 100 people are doing SIPs, and the market falls 5per cent to 10 per cent, not all will stop. 5 or 10 will stop, but there will be 2 new investors to compensate.
What is Kotak’s fund house view on Nifty index for December 2024?
As for Kotak’s view on the Nifty index for December 2024 is concerned, there is no specific target, but based on earnings projections, we expect a return of around 12-14 per cent over the next three years.
In the long term, the market also moves in line with earnings. Today, the market is a little expensive on the large-cap side. So, instead of 12-14 per cent, you may get 10-12 per cent. It is still a good return for large-cap. So, one cannot say how long it will be. So, going forward, what could drive the markets is a question mark.
What is your take on the Indian equity market now?
At this point, we are cautious about the Indian market, particularly in the mid and small-cap segments due to their valuations. While fundamentals are not extremely negative, we need to watch the situation. The first quarter (April-June) was the first negative reading, and September is likely to be weak. Even though we tend to have an optimistic macroeconomic outlook, there isn’t always a one-to-one correlation with corporate earnings. Before 2020, for about 3 years, the economy was growing at 6.5-7per cent. Now, we are growing at around 7per cent, but corporate earnings growth rates have changed. There is no direct correlation between GDP growth and corporate growth, as companies also go through cycles.
While we initially expected corporate earnings growth to be around 15per cent, it is now closer to 11 per cent. If the second quarter is as weak as the first, achieving even 11 per cent will be difficult, which will impact the market’s valuation. If the market remains like this, it could become more expensive and lead to a correction.
What can drive the Indian equity markets going forward?
Continuing earnings growth. As in, if the first quarter was uplifted, then again it comes back. Festive season is important. Festive season is strong. Margins will also improve. It will cover the first quarter. If, let’s say, war stops or doesn’t escalate, then fundamentally the demand for oil is going down in the global market. So, it may come down slowly. Or if China slows down too much, then whatever people are going there still because of the valuation will also stop going there.
What about risk of Corporate India’s earnings growth losing momentum in Q2 or Q3?
In terms of earnings growth, first time in the first quarter of this fiscal year, in June, we have seen a single digit growth for Nifty. Which has not happened for four and a half years.
After the COVID war, every quarter it has been extraordinarily strong earnings. Now, market did not react so much in July, despite these dwindling numbers. Because one, the expectations themselves were of a single digit. One, last year June quarter was extraordinarily strong. Second, this year we had heatwave, elections. So, people assumed it will be bleak. It was bleak. Now, this quarter and next quarter, people will watch out. People will watch out for the next year. If it continues to be single digit, then obviously there is a risk of not meeting the full year target this year, next year, all of that. So, that is when the current valuations which are so high, by the rate of valuation, the market can come down. And exactly, how people will discount these issues is exceedingly difficult to predict.
While people were starting to fear about slowdown in earnings, crude went down. Although, in the last two, three days it has gone up again. Crude went down, which meant, from an economic perspective or from a market perspective, things will be better with a lag. Because most corporates will derive margins either from crude raw materials or fuel cost or energy. So, there was a belief, in December quarter, there will be improvement in margins. Now again, that narrative has changed in the last three quarters.