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Mutual fund industry getting inflows but growth rate is low: A Balasubramanian, Birla Sun Life AMC

Government is quite serious about building the economy back to the next level of growth.

ET Now|
Nov 29, 2019, 01.05 PM IST
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A Balasubramanian, Aditya Birla Sun Life AMC-1200
The conviction of buying mid and smallcaps is, of course, gradually coming back because people are not jumping and buying, saying now it is the sector to invest in.
A Balasubramanian of Aditya Birla Sun Life AMC says the market is picking up momentum and shifting towards smallcap and midcap companies as largecaps are about to peak out in terms of valuation. "It is not that everything will continue to perform continuously year-after-year without any substantial improvement in earnings," he told ETNOW in an interview. Edited excerpts:

ET Now: The last time we were talking, the sentiment was a lot worse. Are things looking up?

A Balasubramanian: The market sentiment has been improving over the last two-three months on the back of credit market showing some kind of uplift, since the time the IBC resolution process that came more in favour of Essar. It gave confidence to the financial market that the resolution process for some of the pending issues can actually get hastened up

ET Now: And will it favour creditors?

A Balasubramanian: This will favour creditors and actually give a lot more clarity from the banking system point of view.

In the last one month, the sector that has outperformed the market. The banking and financial services sector has performed well just because of one clarity that came in. Second, there was a lot of apprehension about finding a resolution for the financial service sectors. Parliament has passed a resolution, I think, that they will apply the same principle as an IBC for finding a resolution for NBFCs. I think that boosted the confidence of the market.

And then third, which I think helped the whole financial market is some of the credit resolution which was pending for the last say six-seven months. The overall pain levels are getting reduced, some resolutions are coming and people are getting back their money and that is the way I think things have improved.

ET Now: Have you got your money back from the Essel Group?

A Balasubramanian: Yes, we got back close to about Rs 850 crore through sale of shares.

ET Now: Have the NAVs of your debt funds gone up by 1% or so?

A Balasubramanian: Debt funds NAVs fell previously because of mark-to-market valuations but now it got corrected back. I am a firm believer in the fixed income market, though a lot of people are getting worried about the credit downgrades and loss of value. But analysts keep saying the loss in value in fixed income is actually the loss in the income. So you have two-component -- which is the income component, then you have a mark to market component and there is interest rate fluctuation component and default component. Default component to the overall proportion of the portfolios is always minuscule and, therefore, actually the eventual loss does not happen but of course one-day loss we can never avoid that.

ET Now: Is the lumpy money coming back to mutual funds?

A Balasubramanian: No. The HNIs, of course, track the portfolio very closely and they do not have much appetite for volatility. I think the biggest change that has happened from investors behaviour point of view is that people are willing to accept the volatility that comes in the equity markets and the thing actually is a part and parcel of the life as far as equity investing is concerned.

ET Now: So, that money has not come back?

A Balasubramanian: No, that money has not come back. Money will come back into other schemes where the volatility will be less and focus will be more on quality and the uncertainties will be low due to fear of downgrades.

ET Now: Will it be equity-focused?

A Balasubramanian: All I am talking about is fixed income focussed. As far as equity is concerned, there has not been much money coming in except via the SIPs. Close to Rs 8000 crore have come in via SIPs but as the market is showing signs of improvement, we have seen redemptions in some of the schemes. But net-net the industry is getting flows, although the rate of growth has come down. Yet, there is no doubt the industry continues to see flows.

ET Now: Are you expecting earnings to play catchup?

A Balasubramanian: I think right now what has happened is the confidence of the outcome that is coming from the government has improved. Government is now listening to the markets; they are listening to various players and are looking at various options for reviving the economic growth including carrying out some of the structural reforms.

The government is quite serious about building the economy back to the next level of growth.

Having said that, earnings is a function of demand-supply situations improving. So, while supply-side of course remains good, the demand side has still not shown big progress.

I assume the demand side will pick up -- one, thanks to the good monsoon that we have seen this year. I think the Jan crop should be the best in the last so many number of years that could boost confidence.

Second, is various steps that the government has been taking in terms of the keeping the interest rates low. And with the growth at about 5.5%, there is a high probability that the Reserve Bank of India will continue to keep the low interest rate regime by cutting the rates further which would ultimately lead to transmission of rates and therefore improve the earnings of the company. I think it is a function of timeline.

ET Now: Sensible investing requires one to take a reasonable view of the economy: you pre-empt where the bad news is and you pre-empt where the good news is. The bad news is that the markets have run up and it is only because of liquidity. There is no good news so far in the economy. So do you think somewhere markets are running ahead of themselves?

A Balasubramanian: Yes, as it always happens, the market discounts the potential actual outcome. They are almost about six to eight months ahead, even almost about a year ahead. And I think if you look at the last six months of behaviour, then there was a time where the disbelief was very high and people felt that government is not taking any action and the economy is slowing down.

In the last four-five months, we are seeing reversal of that. Some action is coming, the economic growth I think will not come back as fast as people are expecting. I think it takes a lot of time. Therefore, the market is actually discounting purely on the basis of what could come say down the line in a year or so.

Second is that you are seeing global money coming in. The global markets have been actually struggling in terms of valuations and are plagued by the same growth concern that we have for India. Therefore, India seems to be the recipient of some of the money which otherwise would have gone to some other emerging markets.

Yes, market always reacts ahead of time and what we are seeing today is purely some kind of hope and optimism that gets build up purely on the basis of revival of the economic growth. Even now there is expectation that direct tax for the individuals will be cut further to boost economic growth. I think such expectations are also keeping the market high.

ET Now: What is the texture of the money flowing into equities? Is it concentrated to banking funds, or are investors sticking with the largecaps? Or finally is some confidence returning to put money into small and midcaps as well?

A Balasubramanian: The conviction of buying mid and smallcaps is, of course, gradually coming back because people are not jumping and buying, saying now it is the sector to invest in. At the same time, because the money is coming in the ETF form that largely favours the largecaps. That is why you will see the portfolios or maybe the index concentrated. About seven-eight stocks still drive the market sentiment which will at least be the case till the time we don't see a significant improvement coming on the sentiment as well as the earnings of the companies which seems to be now coming in the Nifty.

We may see the momentum picking up and shifting towards smaller and midcap companies when the largecap companies peak out in terms of valuation and I think that time will come. It is not that everything will continue to perform continuously year-after-year without any substantial improvement in earnings.

I think time will come where people will take a pause on some of the top names and start looking at the ones below the next Nifty50 or maybe go further down.

ET Now: Why will the economy recover? Why do you think tomorrow will be better than today, why do you think tomorrow will not be worse than today?

A Balasubramanian: We have been for the last 15-20 years been purely driven by investment led demand. While that is one of the driver of the economic growth but not necessarily will be the only driver of the economic growth.

What we have seen so far is that most of the development in India happened only via domestic industrialists or conglomerates putting the plants or looking at expanding their own capacity to build the required growth.
And then there is the public sector and the government, who have been the biggest investors in the country.

But we are not seeing major investment coming from outside the country.

I think the recent measure that Government of India has given in terms of corporate tax cuts it is one of the most attractive inventive for any manufacturing company that would serve in India.

I think it is a big opportunity for global companies to set up in India, therefore my assumption is in the next two years you will see many companies coming from overseas looking at India as investment destination, setting up a manufacturing unit in India and make this India as a base not just for meeting the Indian demand, even the global demand. And this change if it happens, which definitely I think will happen, we will probably see the growth coming back.

Also the rural theme in India is very powerful. One or two good monsoons, good agricultural output, income in the hands of the people at the ground level can boost the consumption big time and if not reflect on GDP growth numbers, it can reflect on companies’ sales numbers and then the economic growth numbers. We can never underestimate the power of rural economy in India.

ET Now: Sectorally, what is the preference and would it continue to be banks?

A Balasubramanian: I always consider banking as the barometer of the Indian economy.

ET Now: But will it go beyond HDFC Bank and ICICI Bank?

A Balasubramanian: I think we will probably spread. One of the good things that is happening among public sector banks is the consolidation exercise. Consolidation has to give some kind of benefit of synergy and also the efficiency benefit should come in. As that starts coming in, I think some of the public sector banks will start behaving like private sector banks due to the leadership change and also the government push.

Today private sector banks are trading at about 4.5-5 times price to book multiples or maybe even higher and some of these public sector banks have got similar kind of network across the country except the operating style could be different from the private sector companies. And such kind of public sector banks are trading at about one time price to book. I think somewhere it has to get corrected.

ET Now: Where do you see the potential for the biggest recovery?

A Balasubramanian: I think biggest recovery can come in the capital goods sector. It has been beaten down quite badly and some of the sectors which actually serve the nation like power sector and power transmission companies could bounce back going forward. These are some of the sectors who have just been beaten very badly for the last so many number of years and they have hard assets. I think as we start seeing things improving in the economy, we will see the companies with hard assets getting right prices.

ET Now: Would you buy telecom or it is a no-no right now?

A Balasubramanian: I think telecom is something which you cannot ignore. The government has brought in a lot of seriousness in finding a resolution for the telecom sector and also by recognising there is a place for three players plus one player of the government of India given we are a large economy.

The need of the economy is very-very large and we are moving towards digital India and therefore paying attention to telecom is right. And that I think will boost the confidence towards the sector.

From money managers point of view, definitely the sector is something which has been beaten down so badly in the last so many number of years that there is some merit in making it a part of the portfolio. But the questions that all of us will have is -- the sustenance of the progress they are making and how well they are getting the pricing power back. But one must consider how much you want to own.

Also Read

Hold telecom, but figure out how much: A Balasubramanian, Birla Sun Life AMC

There is not enough good news to lift market sentiment: A Balasubramanian

Beyond banking, there are opportunities in select sectors: A Balasubramanian, ABSL AMC

Sebi regulations to push up borrowing costs in some sectors: A Balasubramanian, Aditya Birla Sun Life AMC

Allocate more to mid, smallcaps: A Balasubramanian, Aditya Birla Sun Life AMC

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