Buy technology, pharma and private banking stocks: Nilesh Shah, Axis Capital

Indian markets have made a tepid start to 2014, with benchmark indices falling nearly 4% and foreign investors selling Rs 1,650 crore. The tapering of stimulus package by US Fed, subsequent sell-off in emerging markets have hurt Indian markets' performance. Nilesh Shah, managing director and chief executive officer at Axis Capital, says emerging markets such as India will have limited impact from the US Federal Reserve's tapering move. In an interview with ET, he tells that markets are looking forward to next government, which is likely to be pro-reform and pro-growth, and whether it's X, Y, or Z government, it does not matter. Shah is placing his bets on technology, pharmaceuticals, and private banking stocks. Edited excerpts:

Are you concerned about foreign institutional investor flows?

FII flows are necessary as when they start getting cold, we start sneezing. Past experience does suggest that FII flows are important. The point here is whether FIIs are absolutely necessary -- the answer is 'no'. My argument is -- we have huge domestic savings and that is not coming into capital markets. If 10% of domestic savings start coming into local markets, from physical savings to financial savings, then it can more than adequately replace FII flows. We had imported $52 billion of gold in last fiscal (FY13). Imagine, if those $52 billion had come into mutual funds, we would have received twice the FII flows into equities last year. I believe domestic funds over a period will play an important role in markets.

How do you see India getting impacted by US tapering?

The impact on emerging markets like India will be short-term oriented. We need not be worried as we have not received huge inflows. In 2013, we received FII inflows as much as that we received in 2007, even there was no US Fed tapering. Money has come in because we are an attractive investment destination. We can counter balance US Fed tapering by becoming more attractive to investors. There are enough opportunities (like foreign direct investment) within our economy to counter balance the impact of US Fed tapering.

Which are the top sectors currently you are bullish on, and what's the rationale behind your call?

We are positive on technology, pharma and private banking stocks. We believe that technology spending will be strong globally, going forward. We believe the currency will give immense benefit to software companies with cost pressures remaining on the muted side. In the pharmaceutical sector, there is a fair amount of consolidation happening. As income levels are rising, there is incremental spending in healthcare. The global pharmaceutical companies are getting cost conscious and now they are accepting Indian pharmaceutical companies in a more liberal manner. Private sector banks and NBFCs are seen as big beneficiaries of money moving into financial savings from physical savings.

What is the big theme on which you are placing your bets?

We are bullish on import substitution theme as the market has recognised the export theme after the currency has come to a fair value from being overvalued. Many companies which were getting restricted by cheap competition and cheap imports are now producing goods for local markets as well as for exports, and these companies across various arenas are able to give better returns to its shareholders.