Signs of lesser volatility emerging

Nilesh Shah of Kotak AMC believes that the India story has taken a backseat in the current meltdown and signs of lesser volatility is emerging.

RBI's move to raise rates should provide some stability to the rupee, he says. Large part of selling is coming in from retail, leveraged players, but most funds have not seen significant redemptions, he says adding that most funds have seen redemptions of about 1-3 per cent of corpus

Excerpts from CNBC - TV18's exclusive interview with Nilesh Shah:

Are you a bit surprised to find the markets where they are now and do you reckon we could be headed even further down?

Yes surely, the correction is surprising and obviously it has been really triggered by a meltdown in most of the emerging markets world over and a different stand, which investors have really taken world over in terms of the IR likely course of action on interest rates or currency movements.

A lot of investors worldwide have perhaps reacted to that. Having said that in the process what has really happened is that the India story has really taken a back seat.

All along we have always been maintaining that the India story is strong and the fundamentals are strong, that is something that has receded into the background and it is only a matter of time before investors start focusing back on valuations and the underlying India story.

Where is the selling coming in from now because the FII figures are not actually large on the sell side, Mutual funds actually bought yesterday, yet there did not seem to be any holding back of the price falls and some of them were quite meaningless 15-20% effortlessly?

A lot of selling is coming in from retail investors or leveraged players. While of course in May a lot of the excessive futures and options positions could have kind of got squared off.

But a lot of people just probably recouped the losses or have compensated for losses to pay up the margins and are still selling their positions in the cash market. Having said that what was evident yesterday at those 5-10 per cent or maybe even 20 per cent lower levels were a fair amount of buyers.

One could see a lot of stocks getting traded at those lower levels, so it is quite possible that the investors who are taking a bit of a contrarion view on this current environment have actually stepped in to buy. A lot of selling has come in from retail individual investors.

How have you read the move by the RBI and do you expect they do hold a lot for the rupee?

By and large most of the currency experts have been saying that this is very positive. Infact this is a move, which everybody was looking forward to vis-à-vis the currency.

An important aspect, which could stabilize the currency, could be a hike in interest rates. Obviously everybody was expecting this in July but it has happened a few weeks before that. But it should provide some stability to the currency for the time being.

How do you approach the commodity universe given what has been happening in terms of stocks?

In terms of stocks, much of the rally in commodity stocks was triggered by strong commodity prices and analysts had revised their earnings estimates keeping in mind the current commodity prices.

But what one has seen is a shave off in terms of a lot of commodity prices. Most of the commodity prices are down 15-20 per cent from their recent peaks. That could probably trigger a lot of analysts to revise their earnings estimates for individual companies.

While one may not see so much of contraction in the PE multiples for a lot of these commodity oriented stocks, but definitely one might see some pressure on their earnings, which could lead to yet some downside in commodity stocks.

Do you see even more significant downside from here on in the midcap universe because that has really borne the brunt of it and even now stocks are falling 15-20% a day and nobody seems to be coming out and buying them?

If at all there is any downside in the midcap segment, then that would probably be because of technical reasons, because of a set of investors who just want to completely exit that segment.

From a stage of complete euphoria or complete belief we have got into a stage of disbelief. Having said that, several midcap stocks are now quoting at 6 month lows or 12 month lows. A lot of them have come down to single digit PE multiples or slightly at those 10-12 PE multiples.

There are several midcap stocks, which are still growing at about 25-30 per cent and are available at 10-15 PE multiples. The brave hearts can use this kind of an opportunity to buy whenever they see value in the midcap segment.

We have gone back to January levels, how high would you rate the chances of the markets going back to October levels, where we started this rally in terms of price levels?

The October high was perhaps at 8900 and normally October was around 7600-7700. If we were to talk about 8800 as a starting point, now we are at 9250, so we are just 400-500 points away from that kind of a position and that is something, which cannot be ruled out in a situation where the volatility is as high as 4-5 per cent.

The first thing for the market is to stabilize and volatility needs to come down significantly. Volatility, which used to be 1.5-2 per cent, has become 4-5 per cent. If the volatility comes down that could be the first sign of the markets stabilising.

What is it going to take to reduce that volatility because global factors have been less than benign for us?

In this kind of an environment it is hard to guess as to when actually the volatility will stabilise. If one looks at the emerging market, in the last 3-4 days there has been a complete slide but today most of the emerging markets have given up their gains or have come off their days high, but surely they are not down 3-5 per cent today.

We have reached a situation where most of the indices are either flat or are down 1-1.5 per cent. Probably we are getting into a situation where the volatility could start coming down but it is not going to happen overnight.

Have you seen any significant redemption on the PMS side or the mutual fund side? What is your assessment of the grapevine on what kind of redemptions are happening?

I do not think most of the fund houses have seen significant material redemptions. Probably redemptions are broadly in a band of 1-3 per cent of the total corpus, which is anyway getting taken care of by any kind of cash or liquidity that the fund houses own. So I do not think that we are in a situation where the redemptions are very high.

On PMS

Also on the PMS side we are not seeing a situation where there is any kind of redemptions.

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