Aditya Birla Sun Life AMC expects banking and financial services, consumer durables and discretionary companies, select auto companies, capital goods, cement, and pharma sectors to perform well in the coming quarters. "We may also see value buying coming in the public sector companies that will be driven by both strategic sales and also improvement in efficiency parameters," A Balasubramanian, MD and CEO, Aditya Birla Sun Life AMC said in an interview with Fortune India.
He cautioned that markets cannot be driven by a few stocks, and is concerned about the high concentration of select stocks in mutual fund portfolios. “It is also imperative for money managers to pay attention to index weights and its related exposure in the portfolio. By doing this, one will recognise the overweight and underweight positions, and question the deviation to the index and its contribution to the portfolio,” he notes.
Balasubramanian also said the challenge for money managers is to find companies that have remained unscathed from the debt trap at the company and promoter level. “As we move forward, one has to look at companies that can benefit on account of cyclical upturn supported by strong balance sheet and focussed on a single business vertical,” he adds.
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Key economic indicators suggest structural challenges and indicate the growth cycle may take longer to pick up than expected. Are we looking at a prolonged period of the bottoming out process?
It appears we are in a period now of bringing stability to the economy, especially post the NBFC crisis of the recent past and the actions taken by the finance minister to revive the sentiment. During the last year, different macro variables across segments have shown deceleration and the recovery path is likely to take a little longer. Recognising this fact, the central bank has been cutting interest rates and providing adequate liquidity in order to keep it affordable or benign. In our view, the real uptick in the economy at the nominal GDP level could materialise over the next 12 to 18 months. It should be noted that our growth slowing down is also linked to global slowdown and hence we need to give it some time, as a turnaround may take a little longer than anticipated.
Nominal growth of 6.1% raises concerns for corporate earnings. Given the dim outlook for consumer demand, credit supply and risk appetite in the economy, do you expect an earnings downgrade in FY21?
Earnings is the function of growth at a broad level. This will also depend on the supply and demand side situation emerging at each point of time. In the last one year, demand got contracted however supply remained intact. Recent measures from the government have addressed supply-side issues. At the same time, demand-side issues also need to be addressed, which I would believe is one of the top economic agendas for the government. While there’s no doubt that earnings uptick driven by sales push may take some time, however, cost-led earnings improvement may accrue for many firms.
The S&P BSE Sensex and Nifty 50 have hit record highs, but only a few stocks have supported the rally. What's your outlook for the broader market in the next year?
In the last two years, Nifty and Sensex have been outperforming the rest of the market driven by a handful of stocks. Given the fact their weight in the Index is also pretty big, ETF flows or Index funds have been further adding to the higher demand, thus pushing up the valuation. Having seen this, the market cannot be driven by a handful of stocks beyond a point while ignoring the right valuation. There is no doubt on the probability of other stocks in Nifty 50 to perform better as we move forward. In order to make this happen in a decisive manner, one has to see performance uptick apart from change in the buyer behaviour to look at opportunities in this space. It appears to me it is just a matter of time.
In your view, what's the potential upside for the Sensex and Nifty from current levels in the next one year?
Nifty and Sensex would remain buoyant due to global flows as well as hope that is being built from various policy measures from the government. We might see an upside of 5% to 8% from the current level over a period as a result of this.
What's the strategy to manage the downside to generate above average returns on portfolio investments?
Portfolio construction would play a crucial role in managing the risks associated with the market and sectors. It will also be equally important to measure the portfolio weights with respect to index weights. This, in some sense, will create a first level of defence in the portfolio construction. We do keep an eye constantly on the stocks or sectors that one needs to be overweight or underweight on and accordingly initiate suitable action in the portfolio construction.
Across asset classes and sectors, where do you find attractive investment opportunities in the next one year?
Equity should remain attractive, however, one should invest in this asset class beyond a one-year horizon. Within this, sectors like banking and financial services, consumer durables and discretionary companies, select auto companies, capital goods sector, cement, pharma should do well among others. We may also see value buying coming in the public sector companies that will be driven by both strategic sales and also improvement in efficiency parameters.
What's driving the conviction for high returns in small and midcaps versus large-caps when the economy is foundering, liquidity is a key concern, and consumption outlook is weak?
It is purely valuation of this segment vis a vis large companies. Second, interest rate reduction should ultimately benefit this segment of the economy in the form of a reduction in their borrowing costs. Recently, the government has been engaging aggressively in driving the benefit for small sectors in the broad economy. Specific focus such as on loan mela, steps that are being taken to bring stability in the NBFC sectors should help in reviving the sentiment soon. While this segment has done badly in the last two years for a variety of reasons, for the reasons stated above, this segment holds potential to deliver better performance in the years to come.
Where do you see value in terms of price, business scalability, good corporate governance, and high-quality management in the small and midcap segment
There are many companies in the current market environment that have managed to keep their balance sheet strong by not having much leverage on the balance sheet. However, the business would have got impacted due to a cyclical downturn or a slowdown in business due to regulatory changes or slowdown in general in the consumption pattern of the country. The challenge for the money managers is to find companies that have remained unscathed from the debt trap at the company level as well as the promoter level. Wherever underlying business is good, but promoters or owners of the companies are faced with challenges due to business expansion outside their domain expertise have gone through a rough ride. As we move forward, one has to look at companies that can benefit on account of cyclical upturn supported by a strong balance sheet and focussed on a single business vertical.
What level of growth are you witnessing in ETF/index funds? What's the outlook on returns from index funds versus active large-cap funds in the next one year
ETF/Index funds are drawing the attention of both investors and advisors given the outperformance to actively managed funds. Large-cap funds directly compete with index funds, however, the same funds gave an outperformance to index for the last 10 years or more, purely on the basis of stock selection coming from midcap space. But this strategy did not go well in the year 2018–9. One must also remember, given the vast size of the Indian market, it holds the potential of giving alpha over index over time, with a differentiated portfolio to index weights. As the market becomes mature, the same level of alpha generation would be challenging, therefore one should keep ETF and Index as part of the allocation and consider it as complementary to actively managed funds.
Given the volatility, and the fact that only a few stocks are contributing to the run-up in the market, what's the strategy to outperform the market index average in the next one year?
Every fund manager faced this problem this year and hence the outperformance fell short to the index. It is also imperative for money managers to pay attention to index weights and its related exposure in the portfolio. By doing this, one will recognise the overweight and underweight positions, and question the deviation to the index and its contribution to the portfolio. This has to be done at constant intervals to maintain the discipline of proper portfolio construction strategy. Having said that, one has to keep an eye on spotting opportunities outside the index and own them in the portfolio to generate alpha over index fund. Which one may see happening this year given the underperformance of mid and small-cap companies over the last two years to its index rivals.
Is the high concentration of few stocks in the investment portfolios of most mutual fund houses a concern?
It does pose a concern as the overall market cannot be driven by a few stocks. However, this time market got skewed due to various reasons including a significant drop in GDP growth and contracting credit risk appetite in the lending market. Lack of faith in the credit market did take its toll on the broad market. On top of it, the introduction of long-term capital gains tax also had its impact in changing the sentiment towards stock ownership other than index companies from the HNI segment. Lastly, pension and EPFO can invest only in ETF and index funds linked to Nifty or Sensex. This also created a huge demand for index stocks as compared to a few years back which was more broad-based.
What is your asset allocation outlook in the coming year?
Given the rising complexity and slowdown that one is seeing both locally and globally, there is a higher need to focus on asset allocation. Equity has run up a lot and therefore may go through a consolidation phase. Debt too has rallied on the back of continuous rate cut from RBI. Gold has outperformed during the current fiscal. While there is merit for interest rates to be cut further, it will also take into account the rising concern around the fiscal deficit. On the other side, equity market is still living on the hope of structural reforms the finance minister has been undertaking such as tweaking GST rates, finding a solution to telecom, NBFC and real estate sectors. In such a scenario, one has to keep a right balance between debt and equity either through the balanced funds or directly both in individual category spread across short/medium duration funds in fixed income and Multi cap funds in the equity space.
