What is your take on current valuations in various pockets of the market, large-caps, mid- and small-caps?
Markets have generally been more expensive than the historical averages for some time now. That has been the case with global markets. This is because when interest rates are at all-time low, valuations tend to be higher. The expectation was that the earnings cycle may see some mean reversion from multi-year lows, and valuations will be justified with earnings trending up again.
Since March, markets have run up significantly. Barring banking and financials, which are still lower than their past highs, a lot of sectors have moved back to pre-Covid levels. Valuations of large-caps are back to their high points. When we look to the future, we will have to see how the next two-three quarters play out. The impact of the lockdowns will be seen in the next few quarters, in terms of revenue growth and profitability. Valuations don’t appear cheap now. Mid- and small-caps have corrected more than large-caps. We feel small-cap valuations have normalised more than large-caps. This is why we reopened our small-cap fund for fresh subscriptions in April. However, markets are not cheap as they should be in an environment of expected economic slowdown.
What kind of products will help in keeping volatility low, and yet offer equity exposure?
Investors can look at dynamic asset allocation funds. Such products reduce equity exposure when market valuations run up, and increase debt exposure. They do the opposite when equity market valuations are cheap. In an environment where there is limited data, dynamic asset allocation should form a core part of an investor’s portfolio. In an ordinary environment, investors could be well advised to consider other product categories.
Sentiments on debt funds have suffered after the wind-up of certain schemes.
It is important for investors to first factor in the underlying risk in the product. Of the ~15-trillion debt category, a small pool of assets in credit risk funds have led to concerns for investors. However, the balance pool of ~14.7 trillion of assets has consistently delivered returns on their respective mandates.
Debt products will continue to add value to investors to meet their overall asset allocation requirements. Investors should choose product categories, keeping risk and return in mind. Given the weak credit environment, investors can avoid that segment for now, though bad news is priced in.
Interest rates are at an all-time low. Products where investors can’t comprehend interest-rate fluctuations are best avoided. Keeping these categories aside, there are products such as roll-down corporate bond funds with ‘AAA’ portfolios, or two-year maturity short-term bond funds. These are products that investors must evaluate.