Market complacent on tariffs; additional 25% pure hypocrisy: Nilesh Shah

If someone wants 25 per cent returns, I don't see opportunities. For high single-digit or low double-digit returns, there are plenty, says Nilesh Shah of Kotak AMC in this exclusive interview.

As Donald Trump’s new tariffs on India come into play, Nilesh Shah, managing director (MD) of Kotak Mahindra AMC, tells Puneet Wadhwa over a telephone interview that for short-term investors, Indian valuations look expensive; but for long-term investors, corrections are opportunities to add. Edited excerpts:

Do you think the market has reacted the way it should have to the tariff-related events?

I believe the market is still a bit complacent on tariffs and thinks this is just a short-term tactic that will be sorted out soon, which is why the reaction has been muted. But if tariffs remain for a longer period or escalate in some form, then the markets will correct.

 

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But some expected some resolution, or at least a partial relief before August 27. That hasn’t come. How long can markets remain patient?

The collective wisdom of the market still believes that the long-term interests of India and the US are aligned, and this is more of a posturing exercise. But it all depends on how events unfold. One thing is clear: the additional 25 per cent tariff is pure hypocrisy. For example, when US negotiators were in Moscow, they reportedly discussed American oil imports entering Russian energy markets. The US itself has exempted refined petroleum from India from duty. So this is hypocrisy, which is why the market still believes sanity will prevail at the US’ end. However, in international relations, hypocrisy can prevail for long periods. If tariffs persist, markets will eventually correct.

To what extent do June quarter earnings and the road ahead justify India’s premium valuation compared to other emerging markets?

For short-term investors, Indian valuations look expensive. But for long-term investors, corrections are opportunities to add. Over the last decade, Chinese EPS (earnings per share) growth (CSI 300) has been 10 per cent, while India’s Nifty 50 EPS has grown 180 per cent. On a one-year view, India looks expensive; on a five-year view, it looks reasonable. It’s about your time horizon and your confidence in India’s growth story.

FPIs have been selling. To what extent can Indian mutual funds hold the markets together?

It’s not our job to “hold” the markets. We are here to make money for our unit holders. In March 2020, when foreign portfolio investors (FPIs) sold without price limits, we kept buying – from Nifty 12,500 down to 7,500. But today, FPIs are selling at prices—they’re smart, they know India’s long-term story. So, in the short term, it’s a tug of war. Ultimately, both domestic and foreign investors want prices to go up. But let there be no illusion—mutual funds are not here to support markets, only to create value for investors.

So, are you finding enough opportunities to make money for your unit holders?

If investors expect short-term returns, the answer is no. If they expect the same kind of returns as the last five years, again no. But if they expect moderate returns with volatility, then yes. For ten calendar years, Nifty has given positive returns—and the law of averages will catch up.

We keep telling investors to moderate return expectations, be ready for volatility, and follow asset allocation discipline. That’s why we at Kotak MF have been pushing products like multi-asset allocation funds, balanced advantage funds, and equity saving schemes.

Where do you see opportunities right now?

It’s all about bottom-up stock picking. You need entrepreneurs with vision, execution, and governance. From a sectoral perspective, consumer discretionary looks attractive, financial services too. Select mid-cap IT (information technology) companies leveraging AI (artificial intelligence) to deliver better, cheaper, faster solutions look interesting. Cement and home improvement also look good. But you must back businesses that leverage disruption, technology, and unique models—companies with a moat in a rapidly changing world.

How difficult is it for you to deploy funds now, especially with restrictions on overseas investments by mutual funds?

Mutual funds own less than 10 per cent of Indian equities today. Even if that rises to 20 per cent, we can still deploy capital because there are always promoters, PE players, and even SBI selling. We are aiding capital formation. The challenge is not deployment, but investor expectations. If someone wants 25 per cent returns, I don’t see opportunities. For high single-digit or low double-digit returns, there are plenty. For high margin-of-safety investments, not many. But with volatility in mind, there are opportunities.