"It is crucial that investors get their asset allocation right"

"It is crucial that investors get their asset allocation right"

A. Balasubramanian
MD & CEO, Aditya Birla Sun Life AMC Limited

What was the idea behind the launch of a multi-cap fund at the current juncture and what led to such a huge , response from the investors?

The multi-cap category is mandated to invest at least 25 per cent in each of the three market cap segments of large, mid and small-caps. This well-defined and disciplined market cap allocation helps invest in fast growing sectors and companies from across the spectrum, while balancing out the risk reward proposition with relative safety of large-caps. The fund is focused towards secular growth opportunities that cover a broad range of sectors and companies which are aligned to India’s growth cycle and expects to provide healthy participa-tion in the ensuing market recovery.

With an easy fiscal and monetary policy to support economic growth along with low interest rate, surplus liquidity, conducive policies aligned to production linked incentives (PLI), the campaign of self-reliance, Development Finance Institution (DFI), labour and industrial reforms and unprecedented digital adoption, there are multiple macro advantages that reaffirm the expected growth momentum of the Indian economy which can fuel all the segments of the market, especially mid-cap and small-cap companies. Given this backdrop it was an opportune time to launch the fund to capture the opportunities that a broad-based recovery brings along. The interest received in our new fund is a reflection of the growing appetite of equity invest-ments in the country.

The proposition of our multi-cap fund is that it brings a curated combination of three focus portfolios. Investors have seen merit in the diversified proposition which allows them to have exposure in all three market caps through one fund, giving them the stability of large-cap while leveraging the growth potential of mid-caps and small caps. Large-caps are proven quality compounders and must-haves for any portfolio but from a long term perspective, a healthy exposure to the mid-cap and small-cap segments is proven to be growth enhancing and rewarding. A multi-cap fund will also have lower volatility as it is more diversified. So, the overall risk-adjusted returns can be better in such funds.

What will be the impact of the second wave of the corona virus on Indian economy and how will it impact the equity market?

Subsequent waves of the pandemic are not specific to India only but have been a global phenomenon. Financial markets react adversely to unknowns. Last time, when the pandemic hit us for the first time, its impact on economies, growth and sentiment was not known, and governments and policymakers weren’t sure how to respond. But now, the unknowns have transformed into knowns. Governments know how to respond and we have the vaccination programme underway. Plus, this time the lockdowns are in a phased manner with measures that do not bring economic activity to a complete halt. There is some demand destruction due to the second wave but the wave seems to have peaked out. The pandemic-led concerns should not extend beyond 2-3 months and pent-up demand likely to come back. In addition, vaccination supply should improve in the next few months and India may attain herd immunity by the end of this year. India’s economic recovery should come back on track in the medium term and our outlook remains positive.

We already have a fiscal stimulus in place and the RBI has said that the monetary policy is going to remain very accommoda-tive, which will support growth. We think broader markets will continue to outperform and it makes sense to be overweight in equities. Developed markets have done very well so far; hence, global money managers will look to deploy their money moving away from the US into other emerging markets. India in that context is very well-positioned to receive its share of pie. Domestic flows have recovered in the past couple of months and we should see strong domestic flows this year. On account of all these factors the equity markets should remain buoyant.

How do you see the returns from the equity market for the next one year, especially looking at elevated valuation?

After the sharp rally in the markets, valuations seem somewhat stretched from a near term perspective and returns may be muted in the short term. But investors must note that we are in an environment where earnings are not normalised, liquidity is very high, and interest rates are low. So valuations can sustain above their long-term averages. From a medium-term perspec-tive, valuations seem fair as the economy and earnings would normalise by then. It is advisable that investors take a medium-to-long-term view in the current environment and continue  with their mutual fund SIPs in a disciplined manner. Investors should not get carried away by momentum and avoid chasing sectors and stocks that have already run up without any fundamentals or where leverage is high.

Recent data, especially rising commodity prices including crude oil, suggests that inflation may come back with ven-geance. What is your take on inflation and the direction of interest rate in the near to medium term?

Given the easy fiscal and monetary policy and economic recovery coming back, there is a chance of inflation inching up, especially in the US, which can lead central banks to consider tapering some of the measures or hiking rates. But we feel there is still time for that as across the world central banks have reiterated an accommodative stance to support full economic recovery. There is of course a clear view emerging today that interest rates will go up due to returning inflation, rising global yields and fiscal deficit concerns. But the question really is when.

Even in its recent monetary policy, the RBI has clearly said that it will remain accommodative until growth comes back – it is not expressing concern about inflation and expects orderly movement of yields even if the borrowings are high. When the monetary policy is so accommodative, you will not see interest rates rising in a hurry. So, we believe that interest rates will see a material uptrend one or two years down the line. Even the Federal Reserve has been consistently communicating that it will look at the transitory high inflation in US and will maintain an accommodative stance till average inflation reaches 2 per cent YoY and the US reaches full employment. So, the Federal Reserve is expected to talk about interest rate hikes only by the end of 2022.

The recent RBI’s stability report has shown some worrisome signs to the banking sector as the bad loan ratio of banks could rise to 13.5 per cent under the baseline stress scenario by September 2021. What are your thoughts on the same? Should an investor consider trimming position in the banking sector?

As against 5.6 per cent credit growth for the banking system in FY21 we were budgeting 10-11 per cent before the second wave. The current stress is manifest in the self-employed segment and this time around in rural India as well. Conse-quently, we think systemic growth for FY22 could settle at about 8-9 per cent as against 10-11 per cent estimated earlier. In our view, the larger private sector banks should still deliver 14-15 per cent growth, mid-sized and regional banks about 8-9 per cent and PSU banks about 6 per cent. Larger banks have also raised capital to strengthen their balance-sheets and have already taken sufficient provisions which should cover the impact of the pandemic.

Given their ears on the ground, centric collections and lending models, NBFCs specifically in the vehicle finance or MFI segments and SFBs could likely witness stiffer growth chal-lenges. Overall, banks, especially the large private sector banks or select mid-sized banks, are best positioned followed by HFCs. PSU banks look set to report improvement in asset quality and ROA but frequent capital raises below the book remains a dampener for the majority. Our fundamental call on being overweight in banks stands – when the system is flush with liquidity, temporal issues with asset quality can always be easily sorted out.

What is your take on the current boom in commodity prices? Are we in a bubble zone and how should an investor approach a commodity fund?

Commodity prices, especially metals, have substantially gone quieter on the back of demand supply narrowing to neutral to demand position. As a result of this, excess capacity that got built up a few years back got corrected through consolidation of the industry in the last few years. While that being the case, there has been a huge announcement by leading global economies for stepping up the funding in building infrastruc-ture in order to get back on the growth path. In the initial period of the pandemic, most of the fiscal announcements were more in the nature of supporting the common public at large and providing liquidity to citizens of every country.

However, as things progressed, the focus for most of the economies is moving towards building infrastructure which can provide greater employment, demand for various ancillary sectors and associated activities. Hence, it appears that the commodity sector in general is getting into a somewhat sustained positive period except for a few intermittent correc-tions. Commodity funds have globally done well. Given the fact they have already done exceedingly well, they may go through a consolidation phase and it does not appear to be risky while the return expectation needs to be toned down from this sector in the near term.

In the current market condition what asset allocation do you recommend to a retail investor with a moderate risk?

In the current environment where we are seeing high volatility, it is crucial that investors get their asset allocation right. We suggest a two-pronged approach. One, we think broader markets will continue to outperform and it makes sense to be overweight in equities and therefore would like to recommend large and mid-cap, flexi-cap and multi-cap kind of funds. Two, today we have a large pool of investors who are inherently conservative or are worried about markets being at all-time highs. For these investors we recommend our balanced advantage fund, which is dynamically managed between equities, debt and cash equivalents. For investors who do not have the bandwidth to keep rebalancing their portfolios as per asset classes, they can look at asset allocation funds that can take care of it. Investors can just invest in the asset allocation fund and not worry about tracking various asset classes and trying to time the market.


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