Capital Markets have proven their resilience ever since the financial crisis of 2008. Every time a crisis hits, they stretch to their limit and just when you think they will snap, they embark on a sharp wave of recovery.
The multi-year pandemic that we are currently in has led countries across the globe, and also India, to test their durability beyond the usual limits. Last year, the Bombay Stock Exchange (BSE) Sensex crashed over 1,000 points 14 times, with the biggest selloff at nearly 40,00 points in March 2020. Fast forward to February 2021, and we saw markets touching all-time highs despite concerns over an economic revival.
As an investor, how do you make sense of this new normal of volatility and position your investment portfolio to deliver the returns you expect?
In the latest episode of Mutual Fund Mantras, senior journalist Gautam Srinivasan caught up with A Balasubramanian, Managing Director and Chief Operating Officer at Aditya Birla Sunlife AMC Ltd., to share his valuable insights on equities, Mutual Funds and the broader India economic story. Some excerpts:
Q. While clouds hover over India’s economic growth prospects, equities seem to be basking in the sunlight. We are near our peaks again. What is your reading of the current situation considering your experience of past volatile periods?
A. With 23 years of experience in the Mutual Fund industry, one thing that I have learnt is that change is permanent. With continuous change, one has to hold on to optimism on the basis of hope. At the beginning of the pandemic in April 2020, not many would have expected the markets to bounce back the way they have. Historically, a similar trend has emerged. At every crisis, the markets have initially gone down and subsequently on the basis of expected earnings and growth, the markets have always bounced back. What we are seeing today is a reflection of that. The upward path remains constant but we have to go through the volatility.
Q. Do you think that the real economy needs to catch up to the market’s optimism?
A. The optimism comes from 2-3 counts. Firstly, growth expectations which means consumer buying behaviour has to change, produce has to be sold month after month at a higher number, spending has to increase so that the demand for goods is created, so companies sell more and make greater profits. This is linked to the overall Gross Domestic Product (GDP), and the general assumption is that companies will grow in excess of normal GDP. Also, the power of compounding that is used for mutual fund investing also works for optimism building.
Secondly, the power of the money pumped into the system by Reserve Bank of India (RBI) at this time is more than I have ever seen. The money ultimately leads to a growth comeback, and with that, earnings start to come back. So, it starts with hope and optimism, comes growth and then consolidation.
Q. With growth also comes inflation. While the Central Bank might have favoured growth, wholesale price inflation has galloped to a 11-year high at 10.5 per cent in April. How much power remains with policy makers to contain such flareups and what will be its impact on India Inc?
A. Inflation is a function of supply and demand of every commodity that operates. Over the past one year, commodity prices – especially metal prices – have gone up significantly. Inflation is profitable for the companies producing goods. But for industries using metals such as auto or construction, this could push up input costs. And, when the absorbing capacity of companies goes down, it impacts the stock markets.
Today, we have a scenario were capacity is limited but that demand is picking up mainly because governments around the world have been putting in trillions of dollars in infrastructure building in order to create demand for certain commodities, thereby bringing in a first price improvement. If that is the case, we are probably in a cyclical long run bull market, especially in the commodities space. I see this as a change in the way forward where government spending led growth is pushing a segment of the economy, thereby reviving the economy.
Q. We see healthcare, logistics and supply chain as great investment options today. If we are in the initial stages of a new earnings and growth cycle, how should investors read sectors which are currently in distress like auto? Is it an opportunity to buy old economy stocks and which sectoral themes would you prefer and which ones would you avoid?
A. Historically, I have seen that the market is a good mix of growth and value. In the initial phase, markets always chase growth. We are at the stage where value companies would get preference over growth companies. The old economy companies, like automobile or commodities get a significant added advantage as when demand comes back from consumers, with low interest rates, those sectors will also participate.
From a savers point of view, it is going to be a challenging period of not generating enough return from bank deposits. Therefore, ultra conservative investors have to migrate to the Mutual Fund, Fixed Income space. Mutual Fund has some beauties – interest accrual and market price fluctuation. Interest rate fluctuations create some ups and downs in returns. But, in a 5-10 year cycle, Fixed Income generally gives a good experience to the investor.
Q. If investors want to beat the cycle and create returns, do you see tactical asset allocation by the average investor gaining more momentum, especially considering the high volatility being seen these days. What are the dos and don’ts you would advice?
A. Tactical asset allocation is actually a principle of discipline that honours an association between equity and debt. Whenever the past returns on one asset class are substantially higher than your expectations, one has to do some reallocation of those assets to move to say fixed income and equity and also include some amount of gold as an asset class in that space.
I actually advocate to most investors to start with a 50-50 kind of model towards equity and debt. And, depending upon what is the expected return that one can get, arrange your asset classes and increase your weightage as per the expected return. Keep rebalancing it as what you decide today may not be the same say after three months once you have achieved your targets. Constant rebalancing by marginal tinkering between equity and debt is needed, and gold can remain as a constant. If individuals cannot do that day to day portfolio allocation, you can look at the funds some of us are offering.
Q. If you had to ask a question to money, what would it be?
A. Money has to have an element of safety, it has to take care of your future needs and at the same time you also need to have some kind of expectation on various assets which will make an investment do better and diversify the portfolio. It’s about creating wealth alone. It’s about creating a holistic experience of creating wealth as well as an income which helps you save for any emergency.
In today’s times, Mutual Funds have emerged as an effective tool to beat the cycles of volatility in Capital Markets. The discussion offered valuable insights into the right investment strategies and an understanding which products are better suited for your risk profile in the context of India’s economic growth prospects. In conclusion, the golden rule is to have a well-diversified portfolio, with regular reallocation.