nilesh shah: Nilesh Shah’s tips for surviving a bear market and making money too

“A combination of technical factors, fundamental factors and psychological factors can give us an idea of ​​whether bad news is being discounted or not. Will this help us time the market to perfection, capturing 18500 top and 15500 bottom? The answer is clearly no. We will get an idea of ​​the direction, not the magnitude,” says Nilesh ShahMD, Kotak AMC

We’re in a bear market. How do you deal with such a bear market?
We are undoubtedly in a market that is declining and the only thing that works in such a market is sticking to the basics. This is the market where you are not leveraged, you are not trading too much, you are trying to maintain your asset allocation. When markets fall, don’t be afraid of bad news, and when the market bounces, don’t get carried away by the bounce. In a declining market, you try to catch a falling knife. In a rising market you get some profit out of it. So maintaining your asset allocation and sticking to the basics is the best option for making money in this market.

What’s the best way to understand that always-forward-looking markets discount a lot of bad news? How does one find out? Inflation Is A Concern And The War Is Here To Stay The point is how much of the current inflation scenario and a hard landing in the US is in the price?
There are a few ways and there is no one right way. First, when markets traded above historical average valuations, most of the bad news is not yet priced in. The market is working on optimism. When you’re around the historical average, you still know that some of the bad news is priced in, but not all the bad news, and when you start trading below historical average valuations, you know that most of the bad news is priced in. Look at the valuations not of the market but of your portfolio to find out if bad news is priced in or not.

The second has to do with flow behaviour. The private HNI investors have large leveraged positions. When open rates are very high, when you see high carry being offered for rollovers in F&O, you know that people are optimistic and they haven’t taken the bad news into account yet. On the other hand, if you notice that the carry is very low or negative and the OI has fallen dramatically, then you know that the market is very light from a flow standpoint.

The third point will also be investor behavior. When all the headlines show that the markets have corrected and one should generally steer clear of the market, you know the market has bottomed out and discounted all the bad news. When the consensus is that markets will fall or rise, the market invariably throws a surprise.

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So a combination of technical factors, fundamental factors and psychological factors together can give you an idea of ​​whether bad news is being discounted or not. Will this help you time the market to perfection by capturing 18500 above and 15500 below? The answer is clearly no, you get an idea of ​​the direction, not the magnitude.

With all this bleak and ominous bad news rolling in, there is also a shift in leadership across sectors. How do you prepare for the next bull run, because it has to start now? It’s too late to start selling out. Is it too early to start buying?
One thing that stands out in my interaction with investors and distributors over the past few weeks is that investor confidence is much greater than fund manager confidence. Normally, in a market like this, we’re going to tell investors not to worry and to keep faith in India’s long-term growth story. With investors giving us this message, the markets are volatile, but overall we’re fine.

This is a source of concern and a sense of confidence. I feel that most retail and HNI investors are willing to keep a close eye on volatility. They have come of age through their experience in 2000, 2008 and 2020 and clearly in the tug-of-war between domestic investors and global investors, domestic investors remain fairly confident.

What do we do as fund managers in such an environment? We do not accept cash as we are obligated to invest money in the market. Today I have divided markets into three buckets; one that is expensive when valuations are still above the historical average and valuations are either really sky high due to concentrated holdings, low floating stocks, or other reasons. We completely avoid that sector, even if it can give us short-term performance.

The other segment is stocks that are cheap. Some of them have done well because they were very, very cheap and they have bounced back, but we think they are cheap over time for a reason and are unlikely to deliver.

We are targeting the mid-range sector or portfolio, where valuations are reasonable and companies are unleveraged. In this kind of environment of rising interest rates, leverage can have an impact. We are not willing to pay the price/vision PE ratio, we are happy to pay the price/cash PE ratio. So no leverage, no skyrocketing valuations, good companies, real companies, solid companies and there are plenty of opportunities in the market. We build up such a portfolio.

One specific thing that we’re watching closely is whether our businesses can withstand the price hike. We are in an inflationary environment. There is cost pressure and not every company has the ability to implement the price increase. We are trying to build a portfolio of companies that can pass the price increase to consumers and maintain or improve margins. Broadly speaking, this is what we’ve been doing over the past few months.

Have you found out for yourself why fund managers are more pessimistic than investors?
This is definitely my own observation over the past few weeks with thousands of investors and distributors. The maturity shown by domestic investors this time around is truly legendary and it is thanks to their flow and dedication that the markets are where they are today.

As a fund manager, are you concerned that if you look at all those headlines that the retail participant could make a turnaround, I know they haven’t so far, because all the data shared by AMFI suggests the influx is stalling, but given the kind of sharp shifts and the kind of pain the retail janta has faced, does he ever worry that the DIIs the market is actually pinning on could flip?
Undoubtedly, the concern will always remain and that is why we depend on the media to get the message across to the investors. In March of ’20, many investors saw their SIP yield drop dramatically. The three-year SIP yield was negative, the five-year SIP yield was lower than the savings account yield, and the ten-year SIP yield was lower than the FD yield. That pain was visible, but at the time the media continued to communicate with investors not to worry, not to be disturbed by this sharp correction in the market and to continue SIPs.

By the time the markets recovered, they could see yields back in the double digits. Despite the correction in the market, SIP yields are still in high single to double digits today. The March 2020 experience has taught investors to keep investing in SIPs without looking at the returns and in case the returns are lower or negative one should actually do SIP upgrade.

That experience and the training given over so many years has convinced retail investors to stay invested, ignore the short-term volatility and I have a feeling that this time around, domestic investors will continue to use correction as an investment opportunity.

I have a strong feeling that the cycles are getting much shorter and sharper. It’s technology, connectivity, awareness, movement of money. We are all crude oil experts now. I monitor wheat prices every day, I have a comment to make on 10-year paper that I’ve never done in the longest time. I’ve even started following the American 10-year-old newspaper these days. Where have you gained expertise in the past six months?
Well, I was never an expert on geopolitics, especially Eastern Europe and Russia. Now, unfortunately, we have to study that part quite nicely. Second, we also started looking at a variety of data. Talking about the US Treasury and the Fed Reserve points chart before was enough, but these days investors follow that and so we have to follow a lot more stuff to sound informed. But the real challenge we hear is that there is too much noise and people are being misled.

When we spoke to so many brokers, 90% of their investors who opened demat accounts between March ’20 and 2021 in late or early 2022 have actually lost money. In a market that has gone from 7,500 to 15,500, 90% of traders/new account openers have lost money. They were carried away by noise. They got swept up in momentum and ended up losing money.

On the other hand, for people who have invested in mutual funds, their returns over a year may have been negative, but they are much more likely to make money by staying invested rather than trading. That awareness is growing among investors, traders and so every month we see an increase in SIP flow, not only in terms of amount, but also in terms of number of investors.

Cut the noise, ignorance is a blessing and I totally agree with you there. That said, even in all this negative news there is a silver lining. You mentioned recently that there is a decline in bad loans. There has been a considerable cooling in soft commodities or agri commodities from the Russian-Ukraine wartime.
So aside from the raw nature, all other factors seem to be fairly in India’s favor. If crude oil goes from triple digits to double digits, the Indian economy will undoubtedly benefit and any headwinds we see will suddenly be turned into tailwinds.

We need a bit of luck with the rough prices and after that I feel like our economy is in pretty good shape. FDI flows have tripled from 2014 levels. Economic activity is well above pre-pandemic levels. The occupancy rate is now 70%. Inflation is undoubtedly high, but it is mainly driven by food and fuel. Food prices have begun to correct. If fuel prices are correct, inflation will again be below the target level of the RBI.

The base effect of inflation next year will keep inflation below the target level of the RBI. FDI flows have remained strong. The monsoon is expected to be normal. Put all these things together, oil prices move, energy prices start to fall, economy will look much better.

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