'Present market turmoil may be a passing phase India faces every 3-4 years'

A Balasubramanian, Chief Executive Officer, Aditya Birla Sun Life AMC
The markets are down 11 per cent from recent peak levels in September. A BALASUBRAMANIAN, chief executive officer at Aditya Birla Sun Life AMC, tells Puneet Wadhwa that his investment strategy thus far in 2018 has been to stay focused on stock-specific investments. Edited excerpts:

How do you see the markets playing out over the next few months?

So far the year has been extremely tough given the changes in the macro environment, led by oil price movement, currency volatility and rising interest rates. These changes not only created volatility in the markets in India, but the entire emerging market. For India, there is an improvement in the underlying economic growth, but at the same time external factors are turning out to be very challenging. We believe, it is a passing phase that happens in India every three-four years.

What has been your investment strategy in CY2018, and especially in the recent market sell-off?

Our investment strategy has been to stay focused on stock-specific investment opportunities and at the same time take a big picture call on certain sectoral exposure in the portfolio. In the recent sell-off, too, our overall portfolio strategy remained the same, except for having little higher exposure to cash in the portfolio ranging from 6 per cent to 9 per cent across all our equity schemes. The recent significant correction across all sectors has also been used to relook at our portfolio allocation.

Are you facing any redemption pressure in any of your schemes?

Industry does go through some redemptions whenever money market yields harden, and we have seen this in the last few months. Besides, there has been some credit-related events and consequent impact in the non-banking finance market. This development has also resulted in some redemption in the debt funds. However, equity schemes have been witnessing inflow, albeit it is lower than the last few years.

We do see some slowdown in flows in equity. At the same time, industry will continue to get net inflows to the extent of Rs 60 billion to Rs 80 billion, largely supported by growth in the systematic investment plan (SIP) book size.

How do you expect the debt segment playing out after the Reserve Bank of India’s (RBI’s) monetary policy review?

The RBI is drawing comfort on the core inflation, led by food, which has behaved very well in the last few years. The central bank has kept the rate unchanged and changed the outlook from ‘neutral’ to ‘hawkish’ on the basis of both currency movement and global interest rate rise. The bond market, however, is divided between sovereign and corporate bonds. Credit spreads have begun to widen and sovereign bonds have been seeing fall in yields post the policy action. We believe it will remain like this for a while and credit market will begin to price in the risk properly in the coming months, thus clearly differentiating between high- and low-rated bonds.

What are your views on corporate earnings growth?

We believe earnings will stay better for exports and consumption-led companies. However, scores of companies in the financial services space may report relatively lower margins and also companies that have got raw material linked to oil price movement will report a drop in margins. That said, the banking segment may show an improvement — both in their lending growth and margin improvement through increased retail lending growth.

Will active funds find it difficult to generate alpha (excess return of an investment relative to a benchmark index)?

Yes, in the near-term given the skew in the index composition by only a few stocks in terms of their weight, active money managers will find it difficult to beat the benchmark. However, given high potential of India in providing individual stock opportunities outside the large-cap index, over three years and above, money managers will be able to provide the alpha return over the broad index. Historically, this is the way it has worked and hence one should keep faith in the ability of money managers in generating alpha over the long term. That said, overall asset allocation should also consider Index fund as part of the diversification of their portfolio.

Does the fall in bank and non-banking finance companies (NBFCs) present an opportunity?

Stocks have fallen quite significantly in the NBFC space, but one has to look at the overall growth aspiration of each of the individual companies before taking a blanket call on this sector. It should be kept in mind that the financial services sector is a proxy to the Indian economy and would remain a sector to watch out for long-term investing. There might also be a shift towards the banking sector as banks’ focus on building retail growth may also see stepped-up activity and hence improving the long-term outlook on their performance.

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