Equity May Not Deliver The 25-30% Compounded Returns Investors Have Become Wont To: Nilesh Shah

Summary

In this insightful conversation, NES, Managing Director at Kotak Mahindra Asset Management, reflects on India’s economic transformation post-liberalization under Dr. Manmohan Singh, crediting him for the rise of the middle class and financial opportunities. He discusses the resilience of retail investors in mutual funds, with flows continuing strong in 2024 despite market volatility. Looking ahead to 2025, NES highlights sectors like pharma, EMS, banking, and rural-focused consumer stocks as key opportunities, but cautions about high valuations and potential short-term consolidation. The discussion emphasizes the importance of managing investor expectations amidst market fluctuations.

Takeaways

• 😀 NES credits the mutual fund distributors, media, and regulators for fostering trust in financial planning, which has contributed to strong retail investor participation in the market.
• 😀 Despite some volatility, mutual fund inflows in 2024 have been strong, with nearly 3.5 lakh crores invested by November, indicating the resilience of domestic retail investors.
• 😀 The cement sector, although not performing well in 2024, is seen as undervalued due to infrastructure needs, consolidation, and potential for price stabilization, making it a sector to watch.
• 😀 NES believes the retail investment surge is just the beginning, comparing it to a 'retail tsunami' that will significantly shape India's financial future in the coming decades.
• 😀 Looking ahead to 2025, NES expects sectors like Pharma, EMS (electronics manufacturing services), and digital platforms to continue performing well, though some companies may face valuation corrections.
• 😀 NES emphasizes that 2024 has been a year of strong performance for Pharma and EMS sectors, driven by trends like 'China plus one' and joint ventures, but also cautions about high expectations from the market.
• 😀 For 2025, NES expects a 'year of churn' in the market with sector rotations, where traditional sectors like banking and consumer staples might outperform amidst possible corrections in growth sectors.
• 😀 NES stresses that despite the potential for modest returns in 2025, there is still optimism as long-term investors stay the course and manage their expectations better.
• 😀 The banking sector is likely to outperform in 2025, especially banks with strong credit cultures and minimal exposure to high-risk areas like microfinance and unsecured lending.
• 😀 NES highlights the importance of managing investor expectations, especially considering that the returns from the market in 2025 may not replicate the 25-30% compounded returns seen in recent years.

Q & A

What was the significance of Dr. Manmohan Singh's role in India's economic liberalization?

Dr. Manmohan Singh played a crucial role in India's economic liberalization in 1991, which laid the foundation for economic reforms that allowed India to become a more market-oriented economy. His policies helped reduce the country's dependence on foreign aid, promoted private sector growth, and opened up the market to global competition, contributing to the rise of the middle class.

Why does Nish believe that the domestic retail investor will continue to drive market growth in 2025?

Nish credits the sustained growth of domestic retail investors to a combination of factors, including the role of mutual fund distributors, financial planners, media, and regulators like SEBI. The financialization of savings and the growing trust in mutual funds are seen as key drivers. Nish believes that retail investors are maturing and will continue to fuel the market's growth in 2025, even if the market experiences volatility or sideways movement.

What is the primary challenge for investors in 2025 according to Nish?

The primary challenge for investors in 2025 will be managing expectations around returns. After the high returns seen in recent years, Nish emphasizes that investors should expect more moderate returns, particularly in the context of a potentially range-bound or volatile market. Proper expectation management will be crucial to prevent disappointment and ensure long-term success.

What impact did mutual fund distributors and media play in the financialization of savings in India?

Mutual fund distributors and media have played a significant role in educating investors about long-term financial planning and the benefits of staying invested in equities. This has helped increase trust in mutual funds and led to greater financialization of savings, making investors more aware of the potential of equity markets as a tool for wealth creation.

Why does Nish believe that 2025 may be a year of sector rotation in the Indian market?

Nish suggests that 2025 may see sector rotation as valuations in certain sectors, like Pharma and EMS, become more realistic. He believes that some sectors, such as banks and consumer staples, may start to outperform due to stronger fundamentals and more reasonable valuations. This shift could result in investors moving away from high-growth sectors that may experience consolidation and lower-than-expected earnings.

How does Nish view the performance of the Pharma and EMS sectors in 2024 and 2025?

Nish views the Pharma and EMS sectors as continuing to perform well, especially given global trends like 'China Plus One' and the growing demand for components and joint ventures. However, he also cautions that some companies within these sectors may face valuation challenges, and investors should be mindful of the possibility of disappointment if earnings are delayed or fall short of expectations.

What is the role of valuations in determining market performance in 2025?

Valuations will be a key factor driving market performance in 2025. Nish emphasizes that after a period of high returns, investors should focus more on reasonable valuations when making investment decisions. He believes that valuation will be a critical factor for future returns, with a shift from growth-driven sectors to value-based investing likely to occur in the upcoming year.

How does Nish view the performance of banking and consumer staple sectors in 2025?

Nish believes that banking sectors with strong credit cultures, and consumer staple companies exposed to rural India, will likely outperform in 2025. He attributes this to expected improvements in rural consumer spending, particularly after strong harvests in the kharif and rabi seasons. Additionally, banking stocks with a sound credit culture are likely to benefit from improved lending environments.

What concerns does Nish have regarding the future performance of the industrial and defense sectors?

Nish is selective about industrial and defense sectors, suggesting that while these areas may continue to grow, there could be some consolidation ahead. The market may have high expectations from these sectors, and any deviation from these expectations could lead to disappointments, especially if earnings growth slows down or becomes deferred.

What advice does Nish give to investors regarding their expectations in 2025?

Nish advises investors to moderate their return expectations in 2025, especially after the high returns of the past few years. He warns that investors should be prepared for more modest returns and focus on long-term goals rather than expecting significant short-term gains. Proper expectation management will be key to navigating potential market volatility.