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Pandemic concerns this time won’t extend beyond 2-3 months: A Balasubramanian of Aditya Birla Sun Life AMC

Aarati Krishnan | Updated on April 18, 2021

A Balasubramanian, Managing Director and CEO of Aditya Birla Sun Life AMC   -  Manoej Paateel

A Balasubramanian, Managing Director and CEO of Aditya Birla Sun Life AMC   -  Manoej Paateel

Fiscal stimulus, friendly monetary policy and firm commodity prices point towards normalcy, says the MD and CEO of Aditya Birla Sun Life AMC

The resurgence of Covid has shaken up a seemingly invincible equity market with a broad-based correction now underway. The recent monetary policy review seems to have halted rate increases in their tracks. A hands-on money manager who has seen the Indian stock and bond markets weather three complete cycles, A Balasubramanian, Managing Director and CEO of Aditya Birla Sun Life AMC, offers his views on the strategies that both equity and debt investors must follow now, in an exclusive interaction.

Based on the September and December quarter results, there was hope that strong earnings rebound would lower valuations. This had reduced fears of a sharp correction. But now that we have a second wave of Covid that is leading to partial curfews, will the earnings pick-up be interrupted? Are you turning more cautious?

Not really. One, subsequent waves of Covid are not specific to India but have been a global phenomenon. Financial markets react adversely to unknowns. Last time, when the pandemic hit us for the first time, its impact on economies, growth and sentiment was unknown, and governments weren’t sure how to respond. But now, the unknowns have transformed into knowns. Governments do know how to respond and we have the vaccination programme under way. Plus, this time the lockdowns are not so stringent as to bring economic activity to a halt. Construction activities, for instance, have not been stopped.

Two, we already have a fiscal stimulus in place and the RBI (the Reserve Bank of India) has said that monetary policy is going to remain very accommodative, which will support growth.

Three, we believe that pandemic concerns this time around will not extend beyond 2 or 3 months. This would mean that the pent-up demand can come back more quickly once economic activities normalise. Having been confined to their homes for a year, we believe public at large will be keen to get back to work and this will lead to the demand pull coming back. Therefore, even if earnings growth is delayed, expectations of 12-15 per cent growth in future will continue to drive stock valuations. I think even if companies manage to achieve 90 per cent of their pre-Covid level earnings, markets will be satisfied.

Four, with commodity prices being so firm, commodity companies are delivering strong sets of numbers, which will support market earnings.

Cyclical sectors delivering a 100 per cent gain in the last one year have led the rally, while defensives have underperformed. If the second Covid wave takes root, will the sector preference go back to defensives?

No. The revival you are seeing in commodities is driven by global rather than India-specific factors. Today, the expectation is that China will be one of the fastest-growing economies this year and remain the largest spender in Asia. China growth and spending have always been positive for commodities and materials. Across global economies, there’s a renewed focus on infrastructure building to boost growth. Savings rates have gone up, with people conserving their incomes during Covid. I was reading about the US savings going to $2 trillion.

 

There’s also a stimulus from the Biden administration that is going into infrastructure building. There is a global housing boom under way. In India, we have seen the same approach of the fiscal stimulus actually getting invested into building roads, water pipelines, expanding the Railways and so on. This should sustain higher demand for steel, cement and other basic materials.

I also feel that real estate is at an inflection point in India, with price stability, demand gradually coming back on the back of very low interest rates and State governments extending stamp duty concessions.

Are your equity fund portfolios positioned to benefit from a re-rating of commodities and cyclical sectors? Do you have higher cash positions now?

We don’t take significant cash calls in the portfolios going beyond 6-7 per cent. Right now, we are mostly fully invested. The way I see it , our investment team is balanced between growth and value style managers. We don’t chase growth stocks or value stocks exclusively in our funds but strike a balance.

 

We lean towards a GARP (Growth at a Reasonable Price) model and apply it equally to commodities and cyclicals . We give emphasis on the broad business narrative of a company that show strong earnings potential while also taking into account various other metrics such as return ratios, cash flows etc. This helps to better appreciate the long-term business potential of a company and provides a framework to buy good business with a long-term view.

A good blend of top-down macro analysis and bottom-up stock selection is how we go about it. Today, we have reasonably good exposures to metals by way of Hindalco, Tata Steel etc. This approach leads to deliver better long-term results.

Retail investors are increasingly of the view that they can easily outperform equity fund managers with their direct stock picks. What are you doing to convince investors to still take the mutual fund route?

About a year ago, there was a statement from a leading individual investor in India who is a commodity specialist. He said that had he put money in mutual funds, he would have done better.

Every individual investor will need to go through multiple market cycles to really succeed at investing. An investor who is new to the market and has outperformed with his direct stock portfolio in the last one year may very well panic when the market turns volatile, and exit when he should be buying more.

The benefits of diversification that an MF offers can never be felt over a single market phase. It has to be experienced over a decade-long period. Our belief is that once an investor experiences the benefits of this diversification in the long run, he or she will own a mix of direct stocks and MFs.

The word under-performance is used quite casually in India. Suppose in the last one year, the large-cap index has given 70 per cent return and mid- and small-caps have given 100 per cent, a multi-cap fund would deliver returns that is somewhere in between. It cannot deliver 100 per cent. A one or two percentage points under-performance in a fund relative to the benchmark can be due to a lower mid-/small-cap allocation. Property prices in Cuffe Parade will be different from prices in Kandivali – you can’t compare the two. We should recognise that fund managers don’t have the leeway to take concentrated exposures that the index has.

Our sector specific exposures are capped at 20-25 per cent and stocks at 10 per cent. This is a proven discipline that has withstood multiple cycles. Therefore, investors must have a tolerance band for their funds’ performance against the benchmark on either side and shouldn’t worry about 1-2 percentage points over short periods.

In the debt markets, we have seen a significant trend reversal, from a falling rate scenario to a rising rate scenario. The fund industry has traditionally told investors to match their investment horizon to fund duration. But given the possibility of capital losses, should I even be putting my long-term money in gilt funds or long duration funds?

There is a clear view emerging today that interest rates will go up due to returning inflation, rising global yields and fiscal deficit concerns. But the question is when.

In its recent monetary policy, the RBI has clearly said that it will remain accommodative till growth comes back -- they are not expressing concern about inflation and expect orderly movement of yields even if borrowings are high. This is the first time in my career that I’ve seen RBI being accommodative from every angle -- liquidity maintenance, repo rate, term spreads or providing additional liquidity to needy sectors. When monetary policy is so accommodative, you will not see interest rates rising in a hurry.

So, we believe that interest rates will see a material uptrend one or two years down the line. Today, the yield curve looks very steep because overnight rates and the repo are extremely low. This will not change in a hurry. Once growth comes back decisively, we will see long-term yields rising and the yield curve steepening. Given this view, we feel the 1.5-2-year duration bucket is the right place to be invested. In overnight or liquid funds, the rates are extremely low. But when you stretch your duration to 1 or 2 years you get rates that are 50-60 basis points higher.

In long-term debt funds, what investors should guard against is exiting when past returns turn negative and entering when past returns are in double-digits! This leads to a poor return experience. Long-term debt funds require you to stay invested for long enough for interest accruals to take care of your returns, even if bond price movements are adverse. In our medium- and long-duration debt schemes, we have repositioned our portfolios with a 3- and 5-year roll-down strategy, so that we can get some predictability on our portfolio returns.

What equity strategies do you recommend for retail investors today, given your market view?

We have a two-pronged approach. One, we think broader markets will continue to outperform and so recommend large- and mid-cap funds and multi-cap funds. Two, today we have a large pool of investors who are inherently conservative or are worried about markets being at all-time highs. For these investors, we recommend our balanced advantage fund, which is dynamically managed between equities, debt and cash equivalents. That fund was 80 per cent invested in equities just after the pandemic hit and today has about 45 per cent equity allocation. If you are a first-time investor or an HNI looking to protect against downside to some extent, this fund would be a suitable choice.

Profile

A.Balasubramanian, Bala to friends and colleagues, is the rare CEO who has stuck it out in the Indian mutual fund industry, right from the time the first private players kicked off in 1995. He’s also among the very few money managers who have managed funds through multiple market cycles on both the equity and bond sides. While working as a Chief Dealer in GIC Mutual Fund in 1995, Bala was recruited by Birla Mutual Fund to manage its first balanced fund when the group made its industry debut. Bala moved to the role of Chief Investment Officer and then CEO of Aditya Birla Sun Life Mutual Fund in January 2009.

Published on April 17, 2021

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