Exit poll to improve short-term market confidence; investors focusing on a blueprint for policy reforms: Q&A with Nilesh Shah

A long-term market upswing is contingent upon the new administration enacting meaningful changes within the first 100 days, while the election results and exit poll could spur a brief market surge.

The MD of Kotak Mahindra AMC, Nilesh Shah, forecasts a short-term market surge if exit polls show the BJP-NDA alliance winning handily. He does, however, stress that the new government's ability to carry out meaningful changes over the first 100 days will determine whether the market continues to develop. Shah said in an interview with Mahalakshmi Narayanaswami that while record inflows from local investors have shown high confidence, global investors would be keenly observing policy continuity.

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It seems like the BJP has won handily. For the last several days, the markets were tense. What lesson did you learn? Does this exceed what was anticipated?

The markets priced in the government's continuation, and at these values, they are pricing not just the government's continuation but also the announcement of big bang changes within the first 100 days. While the exit polls are a touch ahead of schedule, the real story after the election will be the type of changes India implements that would validate the country's present values.

Given that the market has been in a favorable frame of mind up until the past few days, what immediate effects do you anticipate? Should we anticipate a circuit up on Monday or Tuesday based on these numbers?

It is improbable that there would be a circuit up. Investors are heavily invested in the market if we split it up between traders and investors. The volume of inflows from domestic investors has reached a historic high. Furthermore, even though FPIs have made considerable gains, they have made a significant part of their portfolios' allocation to India. Very few investors are hesitating to commit; instead, a large number of them have placed bets on the government's ability to continue its reforms. From the perspective of the trader, some profit booking or position reduction has taken place. In the hope of further significant changes, they will probably wait a long time to announce the exit poll and findings.

The market might move in either direction in the near future. However, our price is higher than that of any developing market. In comparison to China, our value is three times higher. In the next 100 days, these prices optimistically factor in a very strong budget and significant changes that will maintain India's development track.

We've heard that during the last several weeks, some funds have seen increased inflows. Do you perceive any momentum among investors who are placing a calculated one-month wager on the markets? Secondly, how much money do you think astute investors have stashed away to hedge against the election risk, knowing that this triumph would send them rushing back into the markets?

We are seeing a rise in the SIP culture in mutual funds, which results in consistent inflow of capital. We detect a decrease in flows if there is a profit booking for a personal reason. And there's a significant spike in flows when redemption ends. We have witnessed very little drop in the previous two months (April and May), which has resulted in stronger inflows into equities mutual funds.

A transaction of "sell India, buy China" has been taking place. Do you anticipate a large number of foreign investors holding out for this decision, becoming more confident in the continuation of policy, and making a hasty return?

I think the majority of significant, well-known investors have holdings in both China and India. With this type of mandate and the changes we are doing, there is no way that foreigners would overlook India if we can make sure that our weight in the MSCI Emerging Market Index keeps rising. Recall that they own sufficient funds to divide between China and India together. For instance, our weighting will increase by 1% if Korea is promoted from the MSCI Emerging Market Index into the developed market. There would be an additional 1 percent weighting in the emerging markets index if HDFC Bank were to be added at 100% weightage rather than 50%.

Given the previous concern over valuations in March and the money that has since been reinjected into these funds after a little outflow, can the small cap rise continue? What could possibly put an end to this enthusiasm, given the new administration and the continuous positivity?

Legendary US Fed chairman Alan Greenspan once observed that it is always preferable to clean up after a bubble bursts rather than trying to foresee when one would occur. The adage "markets can remain irrational longer than you can remain solvent" was spoken by another great investor. As fund managers, we have the authority to make decisions based on what seems costly in comparison to past value, a worldwide peer group, or prospective profits growth. However, there will always be an upswing and downswing in market values.

I would concede that Indian investors have come a long way. "Don't worry, the long-term growth story in India is good," they add. I really hope and pray that we will keep delivering on India's development, governance, and green transformation. I've noticed that real profits delivery exceeds initial estimates at the start of FI24 for the first time in a long time. Should we be able to sustain that pattern, the adjustments will be far more fleeting. And if you have enough time on your side, every correction will provide a fantastic chance to purchase.

The proverb "buy on rumor, sell on news" seems to be applicable in light of the current market surge ahead of the election result. Should the election outcomes prove to be favorable, may this mark a sea change? Will the good vibes continue, or will focus turn to impending matters like the budget, or will the market get nervous about possible policy adjustments like tampering with capital gains?

It is true that investors adhere to the adage, "buy on rumors, sell on news." Yet, investors in India are not making their purchases based just on performance rumors. They are purchasing goods in anticipation of India's economic ascent from the fifth to the third rank. Every correction will be a chance for them to make an investment.

Many traders have already lowered their holdings, in their opinion. Some FPIs may have even taken short positions, according to reports. The majority of Indian retail traders own derivatives. FPIs may provide a brief coverage, although this is only from the perspective of trading. It won't have a significant effect on the market.