Why Rahul Singh of Tata MF feels balanced advantage or multi-asset funds should be part of core allocation

Interview, Rahul Singh, chief investment officer, equities, Tata Mutual Fund

rahul-singh Rahul Singh

Benchmark equity indices hit fresh record highs on Monday, with the Sensex touching 76,009.68 in intra-day trade. On Friday too, markets had hit fresh highs but failed to maintain the momentum and closed slightly lower. As such, there has been a lot of volatility in the markets over the last few weeks, ahead of the Lok Sabha election results on June 4. Rahul Singh, chief investment officer, equities, Tata Mutual Fund, says the fund house would be conscious of valuations if markets continued to rally. At the same time, one can't be extra-conservative either, he tells THE WEEK.

Q. In recent sessions, we have seen a fair bit of volatility in the stock market...

Ans: The volatility in the last few weeks has led to 2-3 per cent correction, which is quite normal. Too much of effort goes in drawing a correlation between this and the ongoing elections. My own view is it is simple market dynamics and not related to election expectations, except for the fact that voting percentage was low. So, some people correlated that if voting percentage is low, does that mean good or bad news? It could be argued either way. So we just stop thinking about it. But at the same time, if the markets continue to rally from here leading up to the election results, we will be conscious of valuations and do what we need to do in our portfolios. We will not get over-excited.

As long as there is no big shock or surprise in the election, plus or minus 20 seats is not going to make any difference. The economy is looking quite solid and therefore markets are an outcome of that. We always have to be conscious of valuations, and maybe reduce risk a bit from some of the portfolios, but not to reduce risk completely. Since the economy is growing, driven by cyclical recovery on investment cycle, it will require something more concrete for us to be overweight on consumer and IT.

Q. The IT sector has lagged broader markets for some time now. What makes you stay away from it still?

Ans: These are great companies, and the sector will revive. If you see, this is quite a steady sector, it will grow at 8-10-12 per cent CAGR if you take a five-year period and within that period, you get cycles. You got extra returns in COVID, in terms of the topline growing 20-25 per cent. Now, we are seeing the other extreme which is toplines struggling to grow in mid-single digits. And IT sector is competing with other sectors that have the potential to grow at 15-20 per cent. Although IT valuations are lower than peak, it is still not very attractive. So as on today it is difficult to visualise sector-level alpha even though bottom-up stock-level opportunities will keep arising. Outlook, near-term is uncertain, but long-term is steady.

Q. What's your view on consumption as a basket?

Ans: Things are not looking as bad as it looked one year back. The reason for that is the valuation premium of the rest of the market has come down. So, that is a good starting point for us to start looking at stock specific opportunities, which are beginning to emerge. 

Q. Which are the sectors that give you confidence at this point?

Ans: One sector that has done very well and I still think it can do well is power. There is a genuine shortage of power, which is going to hit us. Everything related to that chain, like capital goods, power financing companies, coal, even natural gas, is going to do well. 

The other sector, which I am very bullish on is healthcare and pharma. Healthcare, because hospitals and diagnostics is a ten year story in India. We are just starting there in terms of penetration and potential. In pharma also companies have sorted themselves out after the downturn which started post 2015. Each company is now conscious of what kind of product pipeline they have, more specialty and complex generics and not the commodity generics. In the US, the pricing environment is improving or at least not deteriorating as much. You may not see the return of the heydays, but things have turned there.

The other sector is capital goods and manufacturing in general. But, it is a very broad theme. Another sector to watch out would be auto ancillaries. In large private sector banks, there is valuation comfort and the negatives in terms of margin pressure and/or slower growth seems to have been priced in.

If the economy is going to grow at 6-7 per cent, credit growth can be quite robust. You will have these periods where you are worried about margins and so on. But then, the large private banks are excellent compounding stories from here on.

Q. What's your view on their public sector rivals? We have seen such a run up there...

Ans: The good thing about PSU banks this time seems to be that it is not a flash in the pan. They have achieved certain ROE (return on equity) and it is staying there. Meanwhile, the valuation has also got re-rated and today, the difference between private sector banks and PSU bank valuations is at its lowest level in the last 10-12 years. So, it is not to say we will not look at PSU banks. We have a mix of both. But, if I were to rank them, I would say private sector banks and then PSU banks.

Q. Domestic funds have been getting huge inflows, SIP investments are at a record high. But FIIs have been selling heavily. Why do you think there is so much divergence in the mindset?

Ans: Global FII money has three buckets. One is the global funds, which allocate money into India. Second is the emerging market funds, which is the biggest pool of money that comes into India. The third is the India dedicated offshore funds. The third bucket is getting huge inflows. But, that pales in comparison to the outflows which are happening in the global emerging market (EM) funds.

This is happening because the EM funds are dominated by negative sentiment around China which has large weight in EM indices. As China and other EMs are not doing well, that pool of capital is seeing outflows. We don't know when that will reverse; maybe after rate cuts commence and/or dollar weakens.

Q. Given the valuations, given where the economy is, and as the election dynamics play out this year, looking ahead into 2025 as an investor what would you do?

One should keep 40 per cent in balanced advantage funds or multi-asset funds, keep 40 per cent in large and midcap funds and value-oriented funds, because that is where the stability is and keep 20 per cent in a combination of smallcap or thematic funds. If you are bullish on banking, then be in banking and smallcap, if you are bullish on healthcare, then be in pharma, healthcare and smallcap. We have to be in those areas where the economy is doing well. We can't be extra-conservative, but at the same time must keep an eye on valuations. Therefore, balanced advantage or multi-asset funds should be your core allocation.

Q. Typically, smallcaps go through cycles. But, you see the rally has more legs this time given the opportunities that you find in that space?

Ans: We have more choices in smallcaps. Plus, the sectors, which are growing, smallcaps offer more opportunities in those sectors and segments. So, you get much more choice and you can therefore make a portfolio, which is slightly more sensible rather than getting carried away in terms of valuations.

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