Despite the revival in foreign flows in the past few months, A Balasubramanian, chief executive officer, Birla Sun Life Asset Management, in an interview with Puneet Wadhwa, says the overcast macro-economic weather is likely to keep the markets in a limited range over the next few quarters. Edited excerpts:
Given the macro-economic headwinds, how are you approaching the equity markets? What is your investment strategy at Birla Sun Life?
Our approach to equity investing is on the basis of company fundamentals, largely driven by revenue growth, an increase in market share, a strong pipeline of products, leadership in its category, strong cash generation capability and a strong balance sheet.
Against this backdrop, while applying the bottom-up stock picking investment principle, macro variables do have a say in our sector allocations. Currently, we do not have any strong sector preference, though our portfolios are recording more opportunities in healthcare, private sector banks, cement and select industrials, as a result of the selection process.
Is there lack of conviction about how the markets may pan out?
When the economy is going through a down cycle, naturally, equity markets will struggle to generate returns for investors in the short term. There is conviction that the interest rate rise cycle has peaked. Asset growth for the mutual fund industry would largely depend on the change in macro variables.
We believe the growth deceleration is likely to compound, on account of the deficient monsoon, its resultant impact on the primary sector and consequently, the second round effects. Risks of a prolonged slowdown have increased, and if these materialise, the revival in earnings growth could be further delayed.
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The overcast macro-economic weather would likely keep markets in a limited range over the next few quarters. However, any impetus in the form of a rate reduction, fiscal consolidation or increased spending on infrastructure would lead to an improvement in market conditions.
Given these circumstances, do people prefer to invest more in debt? And, is this a prudent strategy?
In the last few years, fixed income schemes, including liquid funds, have seen a higher level of participation. This is partly due to the poor domestic economic conditions, as well as uncertainty in the global economy, especially Europe. On account of these, we have witnessed inflows into debt funds.
We are in an extended easing period, which is likely to continue till December 2013. In this period, the Reserve Bank of India (RBI) will not only reduce the repo rate, but probably, also take the effective overnight rate to six per cent.
Interest rates had peaked last year, and would trend downward, given growth in gross domestic product (GDP) is being scaled down to less than six per cent. There would be further improvement in the liquidity condition, and a further reduction in the repo, albeit slowly.
Therefore, tactically, we believe corporate bonds would deliver better returns in the 5-10 year segment, as demand-supply dynamics play a role and rates at the shorter end ease.
Isn't RBI being overly cautious by not slashing rates?
After surprising with a 50-basis point (bps) rate cut in the quarterly review in April, RBI seems to have modified its stance in the last two to three months, focusing primarily on inflation.
Our view is a significant growth slowdown (FY13 GDP growth of 5-5.5 per cent) and moderation in core inflation would allow RBI to cut rates more aggressively (75-100 bps) than what the market expects over the next 6-12 months. So far, RBI has not reacted to the current slowdown because it believes the expected FY13 GDP growth of 6.5 per cent is not far from the potential growth of 7.5 per cent.
What was the quantum of flow into the systematic investment plans (SIP) segment? What returns were you able to generate for investors in this segment, compared to other asset classes?
While SIPs continue to see registrations across the country, the industry (including us) has witnessed de-growth in SIP renewals. I assume this is largely due to the behaviour of the equity market and the expectations of investors in the short term.
SIP returns have been about 8.5 per cent (investments for more than a year are tax-free) in the five-year term in our diversified equity mutual fund schemes, against SIP returns of 4.43 per cent in the Sensex.
Which products are investors most interested in now? Are they moving to more short-duration schemes, against committing for the next few years?
Inflows into mutual funds have largely been on fixed products, especially actively managed, short-term debt products. Products in the fixed income category that are duration-focused, including long-duration funds, would see inflows in the coming months. Equity flows are likely to pick up, given most negatives are being priced in the market.