Considering the rising cases of coronavirus and subsequent lockdowns across states, can we expect another sharp market correction in the near future?
Rising cases in the second wave of Covid 19 and subsequent lockdowns across states has led to concerns emerging on demand deterioration and the resultant impact on corporate profitability. We assess that we are witnessing trends similar to other countries especially in the developed world albeit with a lag of a couple of months as seen during the first wave too. Based on these trends and various epidemiological studies, the spread of the virus typically lasts for 72-75 days post the increase in positivity rates subject to the level of vaccination and lockdown implementation in the region. Various cities and states in India will see similar curves over the next 30-60 days. This would certainly lead to impact in the 1st quarter of FY22. However, we expect this loss in sales would be more than made up in subsequent quarter as was seen with a V-shaped recovery post a nationwide lockdown last year. We do not expect a deep correction in the markets and expect them to remain range bound and data dependent till there is more clarity on the revival in the overall economic outlook.
What is your medium term outlook on equity market?
We are fairly constructive on the medium term equity market outlook. That is because we think that the Indian economy is on a mend. If we look at the last 5 years, our overall GDP (Gross Domestic Product) growth was decelerating due to exogenous events like demonetization, implementation of GST (Goods and Services Tax), bad loans clean up in the banking sector and finally entered a recession due to the spread of Covid 19. With government adopting liberal fiscal policies, giving credit support to MSMEs (Micro, Small and Medium Enterprises), moratorium on interest on interest to retail loans and providing a good framework like PLI (Production Linked Incentive Scheme) to improve the overall industrial outlook coupled with an accommodative stance in the monetary policy with higher focus on growth, we expect the Indian economy to bounce back sharply in the next 3-5 years. We have invariably seen in the last 20 years of Indian equity markets that any acceleration in overall GDP growth and India’s real growth reaching above 7% levels have seen euphoric broader market participation due to high operating leverage.
What is your view on the current market valuation across market capitalization?
Current market valuation on Nifty/Sensex based on 2 year forward multiples are 10% premium to long term averages and is factoring in revival of growth to an extent. We need to put that in the context of low interest rates and high liquidity too. Besides, if we look at small and mid-cap segment, broader markets were in bear markets since 2018 and the last 12 months was the first time they outperformed large caps in the last 4 years. We expect broad market participation to improve from here on too due to improving economic growth outlook benefitting companies across sectors and market caps.
What are the key triggers and risks for equity market?
Science is progressing rather rapidly towards the cure to Covid 19 with a couple of pharmaceuticals and biotech companies providing encouraging initial data readouts which makes us more hopeful of light at the end of the tunnel in the coming 8-10 months to end one of the worst pandemics in human history. We have seen many countries across the world where in growth in money supply is far in excess of nominal GDP growth coupled with high fiscal deficits which acts like a big booster to overall growth once the event is behind us. We have seen such a phenomenon in recent months in DM (Developed Markets) markets with factories in the US humming as demand surges and global PMI (Purchasing Managers' Index) at a new cycle high. Global demand recovery is leading to higher exports from EM (Emerging Market) and driving a new capex cycle. We expect India too to benefit from this trend across varied industries.
One of the important corollaries to this kind of surge is the longer lead times which lead to high price inflation. While central banks across the world are willing to overlook intermittent high inflation for their focus to sustain demand recovery, we think high inflation is one of the key risks factors that we need to monitor. One of the other risks that we must be cognizant about is the possibility of subsequent waves or new mutations of the virus across the world which may dent demand in future quarters. Last but not the least, we do sense high frenzy in DM towards SPAC (Special Purpose Acquisition Company) companies and high valuation to many unicorn businesses in India which have certainly been disruptors but are not making money yet.
What is the objective for launching a multi-cap fund at this point in time?
Multi cap fund is an ideal investment vehicle for an aggressive investor who believes in improving the growth outlook of the economy over the next 3-5 years and resultant benefit that would accrue to broader markets. The fund would have a minimum of 50% allocation to small and mid-cap category as per the mandate and given our assessment of business cycle we would have around 60-65% allocation to that segment today. We assess that the overall economy would witness growth acceleration in the next 3-5 years and expect multi cap fund to benefit from the same.
Can you take us through the fund management strategy of Aditya Birla Sun Life Multi Cap Fund?
Our investment approach for the fund has 3 important points to highlight a) Focussed approach – we plan to build the portfolio with the best of the 15-20 stocks in each of the market cap baskets i.e., large caps, mid-caps and small caps. While the overall portfolio is diversified, the fund would endeavour to have the best of the small and mid-cap stocks from our investment universe of over 400 stocks. b) bottom-up approach – while most of our earlier diversified funds were always sector aware and have top down and bottom up approach, multi cap would be a pure bottom up approach in stock selection and c) growth oriented portfolio – we would have a growth bias while selecting stocks for the portfolio as we believe there are many good opportunities in Indian markets for such a hypothesis
What would be the asset allocation strategy, how often will you rebalance the portfolio and what are the risk mitigation strategies that you propose to deploy in the fund?
Strategy mandates to have at least 25% exposure each in large, mid and small cap segments. Over the next 12-18 months, we intend to have 60-65% exposure to small and mid-cap segment based on our assessment of opportunities available. The fund would be rebalanced every month for the minimum exposure limits as per mandate. In terms of risk mitigation strategies, our first line of defence is at the stock selection level wherein we would avoid investment in companies that have weak corporate governance practices, high leverage, return on capital employed lower than the cost of capital and high promoter pledge. Our second line of defence is to monitor liquidity and impact costs on stocks especially in small and mid-cap segment which are vulnerable to higher market volatility.
How is this fund different from existing multi cap funds in the market?
Most of the existing funds have recategorized themselves as flexi cap funds based on regulators mandate to distinguish both the categories. In a way, we would be one of the first few multi cap funds to be launched as per the new mandate. Generally, the multi cap fund has a higher allocation towards small and mid-caps vs existing flexi cap fund. Another key differentiation would be our growth oriented bottom approach to stock selection.
Why should MFDs consider recommending this NFO to their clients?
Our submission to our partners is that they should consider recommending this fund to aggressive investors who would want to invest in equities from a 5-year time horizon. This fund also helps maintain long term discipline in asset allocation due to auto rebalancing across market caps. Also, this is an apt SIP (Systematic Investment Plan) investment vehicle for an investor who wants to build a long-term corpus from participating in broader equity markets for his future needs.
