Don’t expect any major rally, markets may be range-bound for some time: Amit Shah, IIFL Wealth

Talking to ET Now, Amit Shah, Founder Director, IIFL Wealth, says Indian markets are in a fairly valued to slightly overvalued zone. But with earnings growth kicking in, it should be normalise in the next two to three quarters.

Edited excerpts:

How are you analysing the market right now? We are in the midst of a short covering bout which happened in the last one hour but overall, will we meaningfully recover the lost ground from here on do you not rule out further fall?

I look at this in two formats. One is issues and valuations related to India and the second one is issues related to global markets. In the last one or two months, we have seen greater influence of issues related to global markets where leaders come out and tweet and other leader response to it and the fight goes on without actually anything substantive happening.


That is why if you look at it, global developed markets have been more volatile than India and obviously we cannot be insulated from the global trade war or any other geopolitical issues. Till the time those headlines stop, you want to see some bit of volatility. The issue with India is, for first time I am seeing good positive stuff happening at the micro level. From a medium to long term perspective, I do not see any concerns for any equity investors but in the short term, if one has to look at the domestic issues, you have an overhang of election coming in the next 6 to 12 months.

Apart from that, the earnings season should start in the next couple of weeks and good quality companies should see a reasonable amount of growth and earnings growth. The domestic issues today are less critical from a volatility perspective than what we see at the global level.

What message are you sending out to your HNI clients? What is the outlook when it comes to investing?

You cannot plan year on year. You know the most critical aspect of our advice to investors is asset allocation. 95% of the returns are derived with right asset allocation and only 5% of the returns are derived in long term by selecting the product.

It is quite unfortunate that we spend 90-95% of our time in selecting the product or asset class rather than actually being focussed on the right asset allocation. So, short-term volatility would always remain. Last 17 years, every other year you have seen some or the other event happening but if I consider the stock of last 15, 17, 20 years, investors in equity have still made high double digit post tax returns.

So, from that perspective, if one gets asset allocation right and is comfortable with a bit of volatility, I do not see any reason where any investor should be worried what the portfolios return. In short term, it is very difficult to predict or say anything because everything looks hunky-dory and tomorrow if Mr Trump or someone else comes and makes a statement or attacks some other country for something else, you know markets can go anywhere. We are currently focussed on clients’ right asset allocation based on their risk profile. That is the only message we give to the investors.

What about your new fund launch? What is the objective, what kind of target returns are you seeing or are likely to see?

The reason why we thought of this product was we saw that in fixed deposits, Indian investors have Rs 110 lakh crore whereas in equity funds they have less than 10 lakh crore.

If you add up the liquid and other fixed income allocation, then the number looks much larger and that is the reason why this is happening for last 15-20 years. Every other year, one has seen volatility and fixed income typically is perceived as a go to investment to protect capital which in current context. However, you know it is not protecting the capital because post tax returns were still less than the inflation in the industry.

We wanted to push investors for the right asset allocation and not to compete with the current equity allocation where our belief is equities would create a lot of value over a period of time. We created a product which had an embedded one-year put option along with the equity portfolio with a one-year interval fund.

The investor has not locked in for three or five years and given them a downside protection on an annual basis. The other advantage of this product is if you see last 17 or 20 years, markets have not moved in a linear fashion. If the market moves one or two years up, one or two years down, from that perspective, if you have an annual put option and if markets are moving up say 15%-20% every year, when you roll over the product your hedge is locked in at a higher level compared to buying a long dated put.

We believe this is a great product for investor today who needs an asset allocation to be done in the right fashion and sitting on the sidelines because he is worried about the equity volatility. I do not see this volatility going away in the near future, especially with whatever global events are happening.

In that perspective, we believe that this is a great time to launch something like this. What we have come up with is the First Interval Fund which we are doing now. It is going to end on 30th of June 2019 which means that on the domestic front also, the election and the results would be behind us. Any investors looking at investing for long periods of time can look at this product and keep on rolling it every year. Our belief is for a long-term perspective this product can deliver a reasonably higher return than a typical post tax fixed income return today.

We are on the cusp of the fourth quarter earnings season and the street is quite divided. Some say it will be a muted quarter while other say that low DeMon effect will actually lead to a good quarter. What kind of earnings strength are you pencilling in right now?

Starting second quarter, we expected to see a positive pickup on the earning side though analysts have been talking about it for the last one or two years though it has not happened so far. At the macro level, things look reasonably okay and one does not need to be overly worried about it.

So our view is that Q3 or Q4 of this calendar year should start seeing that pick up. From valuation perspective, we are not cheaply valued now. From a trailing PE perspective, we are still 20 plus. So, I do not see any major rally happening because of the valuations, markets may be range-bound for some time and once we see the earnings recovery kicking in, one may look at a fresh levels.

Also, initially, we were expecting interest rates to go down and which would give a new PE multiple because that is essentially divided by interest rates. I do not see that going down dramatically purely because if developed markets are looking at increasing the interest rates India cannot afford to look at taking them down otherwise it would have an adverse impact on the currency and especially when oil is at $70 plus. With that in mind, interest rates will remain between 7% and 8%. We are in a quite fairly valued to slightly overvalued zone. But with earnings growth kicking in, it should be normalised in the next two to three quarters.

With elections looming large, do you think political risk is going to affect the direction of the Indian equity markets?

If you go by history, political results have implication only in a very short-term perspective. If you go back to 2004, when the actual mandate was very contrary to what people were expecting, we saw markets correcting a bit but then the bounce-back happened. At the end of the day, as one of the Prime Ministers said, India will grow at 7%-8% despite the government and if it is a good governance, it would grow at around 10-11%. Till the time the growth rate is there in the economy and you are seeing the assets being reallocated by the domestic investors from fixed income into equity, the flow in the markets would continue. My only worries on the other side that if the equity flow continues and there is not reasonable supply of good quality stocks, you may see market actually going into a frothy level.