One Of India’s Largest Fund Houses Makes Case For Small, Midcap Stocks

Investors can accumulate small and midcap stocks over next 6-18 months, according to Nilesh Shah, managing director at Kotak Asset Management Co. Ltd.

“It’s the time to accumulate (small and midcap stocks) when valuation is in your favour and fear is there in the market,” Shah told BloombergQuint in an interview. “Midcaps are trading one delta (standard deviation) below their historical average and small caps 2-3 deltas below their historical average.”

Crude oil prices and monsoon—two factors that impact Indian economy “severely”— are currently favourable, Shah said, adding this may lead to better performance by Indian stocks.

"God seems to be with India with oil (prices) and monsoon. There are certain man-made factors we have to manage, and if that happens, despite global uncertainty, we should see a good market especially in small and midcaps going forward,” said Shah.

Shah, however, said markets are anticipating certain policy actions by the government. India’s real interest rates are still high compared with their global peers and this pushes up corporate borrowing rate, he said, making the case for further RBI rate cuts. The Reserve bank of India last week lowered the repo rate by 35 basis points to bring the benchmark to a nine-year-low of 5.4 percent.

Brent crude oil prices, which is the largest component of the country’s import bill, is down 20 percent year-on-year and hovering around $58 per barrel. A turnaround in the monsoon has helped offset the rain deficit, providing relief to farmers who have begun sowing.

Twenty-one out of the country’s 36 sub-divisions had received “normal” rainfall by Aug. 8, according to the India Meteorological Department. Less than a month ago, more than half of the sub-divisions had received deficient rainfall, while 16 had received “normal” rains.

Kotak AMC, which manages assets worth around Rs 1,61,382 crore, is India’s sixth-largest mutual fund manager, according to Bloomberg.

Highlights From The Interview

• Global cues will remain uncertain due to U.S. elections and Federal Reserve’s policy in the near term. However, India needs to fix its economy to buck the trend.
• Liquidity has turned positive from May. Excess liquidity will fuel growth if the same condition persists and it percolates down to borrowers.
• Heavy taxation burden on entrepreneurs must be addressed.
• India spent $22 billion in last year on coal imports despite having large domestic reserves. This calls for revamp of the mining policy that can potentially create jobs.
• Credit constraints visible among corporates. The Rs 70,000 bank recapitalisation plan could be advanced in order to fill the gap.
• Improvement of governance structure in public sector banks can put improve credit flow in the Indian economy.

Watch the full interview here: