Allocate more to mid, smallcaps: A Balasubramanian, Aditya Birla Sun Life AMC
Post election results, there is an uptick on optimism and hope is coming back, says the CEO of ABSL AMC
What are markets watching out for in the near term? Are the growth concerns weighing heavy on markets right now or are they waiting and watching for some near-term cues?
The market is paying attention to the recent slowdown that we are witnessing on the auto sector. The auto sector, after a very long time, have announced shutdown of plants, moving away from three-shift working to a two-shift kind of working and inventory levels have gone up quite significantly. The statements given by most of the auto manufacturing companies is bothering market more from the point of view of the kind of GDP growth which was being expected and we may probably see some bit of slowdown.
Second, some of these auto inventories are also coming from the fact that India is moving towards BS-VI. Therefore, they have to prepare for BS-VI. The inventory level build-up needs to get cleared. Apart from that, how the monsoon plays out is important.
The liquidity is good, interest rates are favourable but clearly some of the macro indicators are not pointing towards the better GDP number. In this context, how the budget is presented will be considered by the market as they wait for some kind of a cue. This hopefully should drive the sentiment for the next few months.
One thing that remains constant post election results is that there is definitely an uptick on the optimism and hope is coming back. Foreign investors are looking more favourably towards India and they are looking long term, for five years and even beyond that. Therefore, allocation towards emerging markets, especially India. from foreign investors have been rising.
Second, some of the deals where attempts were made to close them before the election are all coming back to pursuing those transactions. I am talking about FDI investments in some of the sectors like roads and a few other assets. There is a renewed interest in India.
The latest AMFI data showed that for the second consecutive month inflows have come by and especially the kind of inflows that one has seen in small as well as midcap funds. Midcap funds have notched up a good 160% on a month-on-month basis and small cap fund inflows are up nearly 50%. In times to come, could we see a bigger recovery in broader markets?
Of course, obviously that optimism is coming back for, generally rest of the Nifty, Sensex kind of stocks which are underperforming for the last one and a half years, in our view will come back. Second, one of the data points that we are looking at is that Sensex is at an all-time high post election outcome. Nifty also is at an all-time high. If you look at the midcap and small cap indices, they are still trading at about 16% lower than the peak at which they touched.
They are lower still to the peak price that they have touched and there is still a long way to go. Also, the whole interest rate cut environment that we are seeing, thanks to liquidity and easy interest rate scenario, has to benefit the large pool of companies coming from the mid and smallcap space. Therefore the optimism is returning about India, Now we have seen a significant outperformance from the large cap indices -- Sensex and Nifty -- and that is putting the valuations a little high. As a result of that, the question mark on the valuation in mid and small cap companies has now got corrected.
Probably we will see in the next three-four years, the mid and smallcap companies will do much better. Ultimately everything will boil down to stock specific, sector specific but clearly a trend is emerging that the segment will move up that is why we have seen close to about Rs 5500 crore inflows for the mutual funds in May, which is better than April. The fact that this inflow is coming in the mid and small cap space essentially means that people are willing to take a bet with a three-five years kind of timeframe.
Would you say that maybe now is the time to make a larger exposure and larger allocation to mid and small cap funds as opposed to the balanced category?
The 10-year bond yield is about 7% and corporate bond yields for AAA corporates is close to 7.8% and we will probably see some more rate cut, which essentially means one has to go for growth, for pure equity and naturally the mid and small cap space given the fact valuation wise they are relatively better than largecap names and on improved earnings, any uptick could come faster in this segment.
Therefore it makes sense to move into that segment. The balanced advantage fund is more for conservative investors. When the interest rates are at the mid single digit level, naturally one should expect relatively not so better outcome though it can protect your downside, there is absolutely no doubt but since you are looking at high optimism kind of scenario, it makes sense to have higher allocation towards mid and small cap names.
But debt funds have really left a very bitter taste in the retail participants’ hands. Would you advise a balanced approach when it comes to both debt and equity allocation because the recent past has told us that even debt investments are not really foolproof and come with extremely high risks of their own?
No one single investment gives you linear return continuously year after year and that is why asset allocation plays a very key role. I always believe one should stay with a 50-50 kind of formula, 50% towards equity, 50% towards debt. There is absolutely no doubt in the last six-seven months since IL&FS crisis happened in the month of September and the credit noise levels in industry has been quite high.
But again, it is blown out of proportions. Given the fact that industry size is pretty large, whether it is IL&FS, or some other credit name, in relation to the overall issue. everyone has to understand that the fixed income has got three components on calculation of NAV. The largest composition of fixed income, NAV come from interest accrual which is nothing but interest credit that we get and which drives the largest proportion of the NAV movement.
That has been the case whenever there is credit loss, the credit downgrades and therefore mark to market losses. Those are of a more temporary nature. Some recovery will come. I will have less recovery but at the end of the day, if you stay invested for three- to five-year period, it does definitely give a better experience and that is something one should keep in mind.
There is absolutely no doubt there a general negativism has set in. One should ignore that and given the fact that the loss given ratio in fixed income in the worst case scenario would be about 20%, that 20% or 25% is going to come from only some portion of the portfolio, it is not going to come from the 100% of the portfolio. Therefore one should stay confident on even allocating some bit of money towards fixed income as well to have the right balance between equity and debt.
If there is any specific that you would like to see or anything that you are hoping to hear from the finance minister this time.
Naturally, of course, lot of expectations get built up pre-election but this time I assume the interim budget will be presented. They have addressed some of those issues about simplifying the tax structure for people who are less than Rs 5 lakh. I would assume the budget would address and give a clear roadmap toward the direct tax reforms and is must.
Give more money in the hands of middle class income population, let us say up to Rs 10 lakh salary income earners in the form of tax cuts. That can potentially lift the whole consumption that is lagging behind currently. There is also a need for giving more incentives to certain sectors like real estate. At the end of the day, the issue that they are facing, the industry both on real estate as well as on auto industry is about inventory build up.
There has to be an actual push that needs to be given even if we are able to create a clear time-bound inventory clearance system. That helps in reducing the inventory level. The new pick up could happen on new construction. Giving some kind of sops to the real estate sectors naturally benefits the other allied sectors. I believe some of those stuff I think will definitely help in drive the economy to the next level as we move forward.
Do you feel we will see some kind of correction in the near term before resuming momentum? Do you think we are fairly placed in broader markets and we will see a lot of opportunity?
There is no doubt that valuations have become a little costly for the Sensex and Nifty as a whole. Definitely they get advantage of the foreign flows and optimism that came back. The overall market is holding back. At the same time, our belief is that earnings will probably start coming in from the third and fourth quarter onwards.
Once the budget is over and this government starts pushing in some of their government spending, that should lead to some kind of pickup in terms of earnings. Also the interest rate cut that has come so far, has not been fully transmitted to the borrowers point of view, probably after one or two quarters that the banks will be forced to cut the rates.
That is the time earnings led by interest rate cut will start accruing to the companies. It is just a catch-up game at this point of time. What is holding the market up is about the optimism and also the flows and that should naturally get converted into the earnings as we move forward.
One has to be stock and sector specific which will play an important attention to that space to construct our portfolio.