Mutual Funds

‘Valuation not the key in a growth economy’


A. Balasubramanian, CEO, Birla Sun Life Mutual Fund,

As a mutual fund industry veteran, A Balasubramanian, CEO, Birla Sun Life Mutual Fund, has seen the ebb and tide of markets over the past couple of decades.

In an interaction with BusinessLine, he said he was confident that the markets are well- placed to rally over the long term. Excerpts:

How long do you expect the current bull markets to last?

We expect the interest and mood to buy equity to continue for the long term. This will be supported by the momentum that will come through economic growth. We will see several factors falling into place, whether it is investment or clearance of projects.

Also, the recent weakening of oil prices and a lowering of consumer price inflation will help. What will make growth sustainable is a good balance between investment and consumption. In the coming months, investments will see a pick-up.

If we resolve power sector issues, industry will start accelerating too. Interest rates will marginally come down. And in a stable environment, we will take some forward-looking steps. Is there any segment where there is valuation comfort?

For some sectors, it is a cyclical recovery. So, they will run ahead of the pack. Sentiment improves, growth comes back, confidence also comes back. Because of this, valuation expands significantly. What has now happened is re-rating of PE multiples.

The next round of re-rating will have to be based purely on earnings improvement. Valuation generally should not be the guiding principle, if your overall growth expectation is getting better.

Today growth expectations are good. The thumb rule is that we should look at valuation in conjunction with expectation of growth rates. Yes, valuation could be a concern if it’s a de-growing economy. This is what I have seen global investors following.

Segments you are bullish on...

Instead of looking only at the sectors, we believe that the market provides continuous opportunities for bottom-up stock picking. For example, 2009-13 was a tough period. But that doesn’t mean mutual fund managers didn’t make money. The focus was on bottom-up stock picking.

If you are going to have a decade of stable and buoyant market, the only way a portfolio manager can make money is by keeping his eyes on bottom-up stock picking. Our job is to keep an eye on relative valuation and what can grow better.

Coming to debt, 10-year G-Sec yields have reduced to 8.2 levels from 8.8 per cent. Has the bond market factored in a definitive rate cut?

Today, the bond market is still in some doubt as to when the rate cut will happen and what its extent will be. So, the other thing that has to be looked at is the five-year overnight indexed swap.

This will show what the expected rate cut or anticipated interest rates in the system will be.

Five-year OIS has dropped to 7.5 per cent now. So once the cut happens, the bond market will rally. Our view is that we will probably see a rate cut in February 2015. It may marginally coincide with an uptick in growth.

After the tax changes in the Budget, have you seen any dip in interest in debt funds and MIPs?

The interest in MIPs is now making a comeback. In fixed income there is a mindset change, thanks to the Budget provisions also.

Anybody who wants to put money looks at debt funds or MIPs with a three-year perspective. And because equity is only one year, people are now thinking of allocating money also to equity, thus participating in the equity markets as well. While some of the policies need not have an impact in terms of facts and figures, they can definitely have a behavioural impact. Behaviour will also drive growth.

So, the Budget has definitely brought about behavioural change in customers, distributors and advisors. They look at equity with a lot more positive outlook now. That’s where the Budget did the master stroke.

Any corrections in the offing?

Correction is a function of various things. When the market goes up, you look for correction, it will keep going up and then correction never comes.

Even from past experience, we are not able to predict this. So what we always say is that it is better to put money in SIPs — which, in the last one year, have doubled for us, amount-wise.

Investors have realised that the equity market is not something you can predict.

But by not investing, you will only be harming yourself.

(Vishwanath Kulkarni also contributed to this article)

Published on November 30, 2014

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