Exactly a month ago nobody was focussing on positives, now we are ignoring negatives. So what is the right market – the one we saw in June when markets bottomed out or the market we are reporting now because it is like a mirror image?
Last few months have been tough for the global economy. The way the policymakers changed their course from gradual hike to a sharp rate hike and then the sudden spike in oil prices, all of them led to a selloff from the global market purely on the basis of the asset allocation model. The global investors have been overweight on emerging markets and US hedge funds have been struggling to make money and the huge crash that we have witnessed in Nasdaq, especially in the companies where the valuations had gone through the roof, all got corrected quite significantly.
Money was moving out of the equity market to either the bond market and a huge amount of laws have forced some of these hedge funds in the US. Small boutique firms also had to be closed down and the uncertainty continued and therefore the challenge that we saw despite the valuation came to an attractive level. The challenge that we saw in the market was largely on account of many unknowns and the only way one can deal with that is by using the asset allocation model. That is why FIIs have been a continuous seller in India and even today they have been sellers.
Did that happen in June, do you think we sold off much more than we deserve to be hammered? But we are still trading above historical valuations. If market valuations were here and this is the average, after the selloff also we were here. So the market was not cheap. So why did the bounce back happen?
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The market always has got two types of behaviours – one, unknowns that come and hit you as the market gets sold off immediately. I think nobody even cares for the valuations.
Just sell and go…
Just sell and go. We normally see it every time the market becomes a bit uncertain and views become uncertain. Second, growth expectations also keep changing. What was the growth expectation last year when the interest rates were low? Also, what is the growth expectation today when the interest rates are rising? Therefore market valuation has to get adjusted.
Third, it is another way to look at earning yields versus bond yields. From a broader perspective, the companies continue to earn so much profit. At the same time, it is not sufficient to give higher valuation when the cost of capital is also rising. So one has to look at it from that context as well. Therefore the market gets sold off because they always remain unprepared for some of these unknowns that could come and hit the market. The way we saw the corrections in commodity prices globally, the way the governments started reacting and after the Reserve Bank of India hiked the first interest rates, it set the ball rolling.
India is going to hike the interest rates as we have seen in the US market. Inflation is real. One cannot ignore and even if it comes at the cost of the growth, at this point of time, inflation control has to become priority.
The priority of course keeps changing from the government point of view. India is the only country including the RBI Governor to maintain a balanced approach, maintaining growth on other side while at the same time, controlling inflation.
I think they are trying to marry these two things to ensure that we are able to get a balanced growth whereas the US did not bother about growth. The US is clearly bothered only about inflation, inflation, inflation! Therefore when the target changes, priority changes and the market allocations or rather the selloff that we have seen normally tends to happen and when valuation is down to a certain level, it becomes a buy.
Therefore I would assume that some of the steps which the Government of India has taken very recently like the rollback of the windfall tax on oil and gas – which they had introduced just 15 days back – because either they are drawing comfort that this will not have much impact on inflation and one has to let this go; at the same time, GST on some items have now increased from 12% to 18%. In certain cases, they have introduced 5% minimum GST. Therefore the government is taking some steps to ensure that on the one side, we ensure that tax collection becomes better and on the other side keep a close watch on inflation and ensure it is under control.
Cheese, paneer, milk everything is expensive…
What is it that you are making of this sectoral shift? Do you now need to place your bets on different kinds of horses?
One of the things that normally happen are the overweight and underweight exposure which one takes in any sector. Autos as a sector has got the least representation in the index and IT as a sector has got almost 14% weightage in the index. Most of the managers would be neutral weight.
Those are your managers…
Yes, including our managers. Second, when the Nasdaq falls quite significantly, the Nasdaq generally is considered the proxy to IT as a sector.
Are very different than….
It is very different from Nasdaq companies. But in asset allocation, when a model changes, naturally they will get sold off. We have seen this especially in times when rupee is touching 80 against the dollar. Ideally speaking, export-driven companies should be the largest beneficiary, including IT companies, going by the guidance which they have given for the quarter.
But the fortunes of auto companies are now beginning to change, especially in the two-wheeler segment, where they have gone through a two-and-a-half years of tough time. We are seeing the revival in buyers’ interest. Passenger vehicles are seeing a revival. Some of the cars launched by auto companies have a waiting period of one year. All this indicates that the sector which has underperformed for quite a long period of time, could see revival and most of the companies appear a little progressive in terms of looking at EV as part of the business as model, rather than ignoring EV.
I would assume that some portion of the buying and selling behaviour is mostly due to the overweight and underweight exposure compared to the index and therefore some adjustment would also play out a bit.
Have your funds made a tactical shift on where you are underweight, overweight etc right now?
We constantly do this. At a time when the market is becoming broader and complex, a money manager has to keep close watch on the benchmark and see where you are overweight and underweight. Definitely auto is a part of our consideration in terms of either we become neutral weight or a little overweight, given that the sector can perform a little better. Plus, a good monsoon can lead to a revival of the rural economy and help boost demand.
Have you reduced IT or added FMCG?
In IT we already were neutral weight, maybe marginally underweight. Metals is the one where we as a fund house had a good run in the metal sector, owning some of the stocks both in aluminium and steel. That exposure has got reduced and shifted to the auto sector to some extent.
Past performance is no guarantee of future returns but that has been used as a benchmark. Do you see SIP culture getting challenged because of recent underperformance?
Not really. On the contrary, since the time volatility set in, sometime in the last one, one and a half, two years, there was a bit of slowdown in terms of flows in the beginning of the pandemic period and post that, it got revived. In fact, the run rate keeps changing and even the run rate per month used to be somewhere in the range of about Rs 8,000-8,500 crore and now it has crossed above Rs 9,000 crore size.
Today we are in the Rs 11,000-12,000 crore range. The kind of new investors who are coming in through the SIP, have also been rising. In the last one and a half years, the number of people who tried their luck by investing in the equity market directly had gone up quite significantly and that was reflected through the number of demat accounts getting opened.
In fact, in the last fall that we witnessed post this Ukrainian war, the kind of money which people lost would have made them realise that investing through the mutual funds via SIPs to build a longer term portfolio is the best way to go about it rather than taking a bet in the equity market directly and burning your fingers.
You are always bullish. Is this the most important factor for an equity investor in a country like India? Be bullish – it does not matter whether it is a war or what is happening in America or what is happening in inflation?
First and foremost, for the investing world, optimism is a must. Whether you like it or not, one has to be a born optimist and the fight factor has to look quite high. At the same time, one needs to have a conviction whether one is investing money for a longer term or short term. Mutual funds are the best vehicles for those who want to put the savings for longer term investment.
At the same time, where the biggest mistakes are made is when one exits as the markets turn extremely volatile. If you move out and then try to time the market, you never get your timing right.
Second, when one starts chasing the return, sometimes we do well, sometimes we do not do well and then we start forming an opinion that this stock is not doing well, this fund is not doing well. As a result, if you start moving in and out, there is a high probability that the rupee cost averaging will completely go away.
Third, on the basis of returns, SIP is agnostic to the market, agnostic to the fund managers, agnostic to even fund houses. Therefore SIP does not allow you to chase the return, it is more of discipline that makes the money.
Longer term, why I am always bullish is because I have seen market cycles for almost 32 years from 1990 till date. Despite going through all the ups and downs, the market always finds its higher level after every two-three years, it finds its higher bottom. It is not rocket science. Nominal GDP compounding factor is one factor which actually makes it work. If every company compounds 11-12-13%, it takes one day to reflect on the stock price as well as on the index. It is as simple as that.
In the last two to two and a half years, you had to focus on equities as fixed income was not making money. Is that changing now?
Definitely yes. That is why I mentioned earnings yields versus bond yields. Today from asset allocation point of view as well as from investors point of view, the recent steps taken by government of India, especially the Reserve Bank of India has made the 10-year bond yields now close to about 7.5%, almost 1.5%, – a 1 or 1.2% rise in yields that cannot be ignored from asset allocation point of view.
Second, just about three years back, fixed income was one of the favourite investment vehicles for every investor. In the last two years, the pandemic brought down interest rates so much and suddenly people are finding it attractive to invest in equity. But that is now undergoing a change definitely even though we are trying to revive some of our open-ended debt funds, where investors can put money for a three-year period. We are trying to revive dynamic bond fund, medium term plans now.
Second, FMP as an asset class died down quite significantly. The rates are not attractive enough for people to park their money for three years or five years and today for the target maturity fund, we raised close to about Rs 10,000 crore in the last few months. Today, the Government of India bond for five years and 10 years is close to about 7-7.5% and corporate bond for five years about 7.5%. This kind of yield is even adjusted for earnings but is attractive for investors to park their money. Therefore, in the overall asset allocation, equity, ETF and even the bond portfolio should be part of the consideration.