Sensex recently surpassed yet another historic mark of 57000. What is your view on the overall market valuation? Where do you see the market heading?
The sharp rally is driven by the strong resilience of the Indian economy and global liquidity. The Indian economy was impacted the most amongst all the countries due to the strict lockdown post the first wave of covid 19. However, given the demographic profile, the resilience of the Indian consumer and structural reforms, we are witnessing renewed interest in manufacturing. All these factors could lead to the economy bouncing back sharply. Markets were pleasantly surprised and are reacting favourably.
India is expected to be the fastest growing economy in CY2021. I will not be surprised if the same momentum continues in CY2022. A favourable economy attracted a disproportionate share of foreign flows into equity markets.
We have always believed equity markets are slaves of earnings. After a lost decade, with a mid-single digit earnings growth, we expect to see earnings growing at over 20% in the next two years. That should justify the keen interest that international market participants and domestic investors have in the Indian equity markets.
Could you take us through the different phases of a business cycle and how will Baroda Business Cycle Fund NFO invest across these?
Baroda Business Cycle Fund aims at identifying macro-economic trends and plans to invest in sectors and stocks that may benefit from these trends.
A business cycle refers to the fluctuation of the economy between periods of expansion and contraction measured by various economic indicators like GDP growth, IIP (Index of Industrial Production), interest rates, inflation, and other macroeconomic variables. We have bucketed them into four parts - Domestic Macro Indicators, Domestic Capex Indicators, International Indicators and Confidence Indices (Business and Consumer).
A business cycle has four distinct phases and certain indicators can help indicate the change in the phase of a business cycle & present opportunities to invest. The stages are recovery, growth, expansion and contraction.
Baroda Business Cycle Fund intends to pursue a top-down investment approach and has a four step approach to the investment process:
- Monitor macro indicators and identify business cycle opportunity
- Identify themes/sectors based on business cycle opportunity
- Identify stocks based on finalized themes/sectors
- A periodic assessment of the macro-economic environment and the subsequent investment approach is conducted, based on which the stock bets may be revised
What are the key sectors that will determine the fund portfolio across the business cycle?
Let us first look at some of the macro variables.
The economy is showing initials signs of recovery, even though the pace of recovery is gradual. At this stage, some of these factors look encouraging:
- Strong consumer demand across sectors as economy reopens
- Record low interest rates, driving increased investor participation in equities
- Robust earnings growth after a lost decade
- Nifty EPS is expected to grow ~25% CAGR from FY21-23, vs ~7% CAGR in the last decade
- Increased capacity utilization
- Capex revival
- Improving GDP growth rate
- Low interest rate scenario with central banks supporting growth
Based on the above factors our assessment says we are somewhere between the recovery and growth phase of the business cycle. Typically infrastructure, commodities (both metals and cement), recovery play do well. We believe Informational Technology (IT) and Pharma are also favorably positioned in the current business cycle.
The sectors mentioned above may or may not form part of the portfolio.
What are the key macro-economic indicators that investors must know about before investing in this NFO?
We are tracking over 32 macro variables classified into:
- Macroeconomic activity indicators
- Investment indicators
- Global indicators
- Business and consumer confidence indicators
Each of these major indicators in turn takes cues from a range of smaller indicators.
The names themselves would help us understand the kind of variables we are tracking under each one of them. For example under macroeconomic indicators, we shall be tracking domestic GDP, IIP, fiscal and current deficit, interest rates, inflation, so on and so forth.
There are rising uncertainties around the third wave of covid-19. Why was the current juncture considered to be the perfect time for the NFO launch?
Post the second wave of covid 19 there is a strong expectation of a third wave, especially with many mutations. It is kind of difficult to base business plans on the outcome of such an unpredictable situation-both in terms of duration and intensity.
Our reading of macroeconomic factors leads us to conclude that India seems to be on a sustained economic growth path in the coming years. The economy is fast recovering. Corporate profits have bounced back. Consumer and business confidence is improving month by month. All this augurs well for strong earnings growth in the coming time period. That should support the markets.
What are the key features of the Baroda Business Cycle Fund NFO?
While the macro-economic data is available to all, it is how you interpret and analyse it which makes the difference.
Baroda Business Cycle Fund plans to have a concentrated sector portfolio and risk mitigation will be provided by a number of stocks. We intend to run the portfolio with about 45-50 stocks in fewer sectors. Sector concentration shows our conviction in business cycle.
For details of investment strategy, kindly refer to Scheme Information Document.
Why do you think Baroda Business Cycle Fund NFO deserves a place in investors' portfolio?
Baroda Business Cycle Fund could benefit from the changes in the economic cycle. Investing is based on macro-economic indicators rather than themes or sectors. It has the ability to move across sectors, with no sectoral caps on allocation and will use top-down approach with bottom-up stock selection approach for investing.
It is suited for investors who aim to benefit from economic recovery over the next few years, want to add style diversification to their portfolio, and aim to create wealth through a fund that could provide higher alpha and better risk-adjusted returns over the long term.
