Equity markets continue to fly high, with the Sensex touching a new intra-day record on Monday. The bull run continues even as the economic recovery remains nascent and COVID-19 continues to remain an overhang, with a possibility of a third wave.
THE WEEK caught up with the MD and CEO of India's fourth-largest mutual fund, with assets under management of over Rs 2.75 lakh crore, A. Balasubramanian of Aditya Birla Sun Life AMC.
He shares his views on the outlook on stock markets, interest rates and key themes the fund house is betting on.
Q. In its latest monetary policy committee meeting, RBI left the Repo Rate unchanged. But, some of the other measures announced signal it is going to normalise the policy through the course of the year. What is your opinion?
The way I see it is, whatever they have done in the last one year in terms of improving the liquidity and keeping the interest rates low, somewhere down the line have to get reversed. The abundant liquidity can’t remain in the system for too long. If it remains for too long, it can unnecessarily create unexpected inflation subsequently.
The state and central governments are running high fiscal deficits and therefore, they will be in the market for borrowing continuously. To an extent, their borrowing will be met with high liquidity. Corporate borrowing is not very high. In the absence of big expansion by bigger corporates, there is no incremental need for large ticket borrowing. The incremental credit demand is coming from small and medium enterprises and retail, for which there is enough liquidity for banks to fund. So, the gradual unwinding process will begin. The latest policy meet does address it in the form VRRR (variable reverse repo rate auctions). I would say it is the beginning of the unwinding process, which will happen gradually.
Q. Does Aditya Birla Sun Life AMC expect an interest rate hike by the end of the year or next year?
Right now, we believe that it (the policy) will be neutral in the absence of (economic) growth not coming back in a hurry. At least, in the current calendar year, it doesn’t look like there will be a rate hike. Till December, we should see a status quo and then take a call as we come closer to that.
Q. You rightly mentioned the absence of growth, the RBI has also mentioned that recovery is nascent. We are still in the midst of the COVID pandemic and there is a possibility of a third wave. Are the equity markets, which continue to touch record highs, discounting all this?
The equity market is driven by the expectation of growth. The second thing is high liquidity. The third aspect is the other asset class in which money can go, they aren’t as attractive or remunerative as equity could be. So, there is investment buying in equity, which is seen in the participation coming from retail as well as HNIs. The global funds are also investing in India; given China’s problems, India is becoming another alternative. Therefore, the equity market will remain buoyant, but the upside could be limited.
At the same time, the downside also may not be large. You will see participation coming from mid and small size companies. To some extent, sectoral rotation could happen. Where ever time correction has happened in the last 2-3 years, in those companies, investors will find value.
Q. A theme your fund house has identified is that small and midcaps will outperform large caps. Given the runup, we have already seen in the past year, how much more steam is left in mid and small caps?
We are taking a five to seven-year view and not a one year view. If the Indian economy has to become a $5 trillion economy, then there will be larger participation coming from the mid and small size companies from an investor returns point of view. There are a lot of automobile companies, chemical companies, lot of textile companies, even in software there are a lot of mid-size companies, the new digital companies. That is why, if I have to take a five to seven-year view, given the Atma Nirbhar Bharat focus, the digitisation focus and given that the large-cap index will go sideways to marginal growth, the broader market participation will set in.
Over one year, mid-caps have, no doubt, gone up. But, from a three and five-year cycle basis, the mid-caps still need to catch up a lot.
Q. What are the sectors expected to do well? A few sectors the fund house has highlighted are real estate and manufacturing…
Real estate is more cyclical. It has gone through years of downcycle. We are in the interest scenario, exactly, we were in 2007. The low-interest rates can boost demand for housing. So, a cyclical uptick will come in the real estate sector. Manufacturing will not be restricted to large companies, you will find the whole space getting attention. With the e-commerce pickup, manufacturing ultimately has to benefit. Pharma, chemicals, auto ancillaries… many companies could start getting the benefit. In addition to that, there will be digital and ESG (environmental, social and governance).
ESG is a theme, which will be applicable for all companies. Bigger companies giving focus on ESG could also gain an added advantage in terms of a premium valuation. These are longer-term themes.
Q. There are has been a flood of IPOs from internet startups. They are getting huge valuations, but most of them are not profitable. What is your view on them?
Aggregator platforms is a new normal in terms of business model. For all such companies that have huge relevance for a customer, the initial valuation will be based on the relevance and therefore the revenue; the number of active customers kind of a model. Eventually, customer contribution will also start playing a role in profitability. The question is whether the consumer pattern changes are short-term and will we all come back to the traditional way of doing things? It doesn’t look like consumers in India will go back to the old model. If that is the case, then the digital platforms could be one to look out for.
Q. Business cycle funds seem to be a flavour of the mutual fund industry currently. Birla Sun Life AMC too has filed papers for such a fund. Why?
These funds are intended to go for sectoral rotation. It will have a long term impact. Every sector goes through three-four years of good period and then two-three years of bad period and then come back. From a money manager’s point of view, assuming one can play this quite smartly, then definitely, the long-term sustainability of the fund is high. Identifying those cycles and changes will be key here.
Q. In recent years, there have been reports of large-cap active funds underperforming and growing voices in favour of index funds and ETFs. You have also launched several index funds. Is passive investing gaining ground in India?
The way I see is ETFs will remain complimentary. Large-cap funds in the last year have outperformed the index. On a two-year basis also they are outperforming. We believe that India will continue to provide greater opportunities for outperformance. Having said that, from an investor point of view, if you take a portfolio approach, suppose index gives 20 per cent returns, my portfolio approach is a mix of various sectors and fixed income and gold, will give me an average of nominal GDP plus three per cent returns. So, the outperformance, underperformance can’t be the driving factor from the customer point of view. There should be an asset allocation strategy, where you can add ETFs. But, it should not come at the cost of actively managed funds.
Q. We have seen a strong retail pull towards direct equity investing and mutual funds. Is that sustainable?
I would assume with the way regulators have reacted post-pandemic, a lot of seriousness will come on getting back on growth. Per capita income will be on the rise. From a global integration point of view, India will gain prominence. So, we will probably see next ten years of a good period from the economy point of view as well as markets angle. Also, the alternative, traditional investments will continue to yield a very poor experience, except probably land. That being the case, the financial asset class will remain one of the core asset classes for people and increase in prominence.
