‘India should see accelerated growth in income as well as consumption’

What is your medium-term outlook on the equity market?

On international front, the Fed remains hawkish and has highlighted the potential for further tightening despite some moderation in inflation. And the US bond yields reflect the risk of a recession in the next 12 months. 

On the domestic side, India's growth and activity data have remained surprisingly buoyant, despite a host of global concerns. Also, we see a firm GDP growth outlook, strong credit demand in the system and a benign inflationary environment for India while the world grapples with concerns about recession and persistent inflation. This makes India a standout.

Further, we believe lower commodity prices should lead to higher corporate margins, together with consumer and government spending. Stable macro, the pace of reforms, infrastructure upgrades and the prospect of manufacturing and consumption-led growth could lift the potential growth for corporates. 

We also remain positive on the market but we believe incremental gains are likely to be earnings-led with less contribution from valuation expansion.

With the market reaching new highs, what should MFDs do with incremental money - should they recommend lumpsum or is STP route better?

Current valuations are higher than the historical average. However, we are nowhere close to the market bubble. Most macroeconomic indicators are favourable and we expect mid to high double digit growth in corporate earnings for the next couple of years supported by rural demand recovery and margin expansion. 

There will always be volatility in the market and we could see some consolidation. However, we do not expect any sharp correction in the market. Hence, our advice would be to remain invested in the market and keep investing regularly. At the same time, if there is an opportunity to make a lumpsum investment, they should not shy away from it from a long term growth perspective.

HSBC MF has launched HSBC Consumption Fund. Why are you so optimistic about the consumption theme?

India is favourably positioned in terms of demographics and will reap the demographic dividend in the coming years. The number of households having an income of Rs 5 lakh and above is expected to double in the next 10 years from the current 95 million. Another advantage is that we have a much younger population compared to countries like the US and China. 

In addition, there has been a substantial increase in access to credit in the last few years, particularly for small ticket items. Credit card spending has grown 12 times in the last 10 years. Easy access to credit will fuel further consumption growth. 

Moreover, India has reached an inflection point of GDP per capita of 2,000 USD, and when this happens, consumer spending pattern changes drastically. We have seen numerous examples like these. The US in 1950/60s, Germany in 1960s, Japan in 1970s, South Korea in 1980s, and recently China in 2000s - saw the J-curve growth once they crossed this inflection point. The good part is that it has played out in many countries with different economic structures, cultures, history and across different time frames. 

This gives us confidence that India should see a similar path and accelerated growth in income as well as consumption, particularly discretionary consumption.

Thematic funds are known for high volatility; how will HSBC Consumption Fund offer downside protection to its investors?

Consumer-oriented companies especially the FMCG sector, have a strong brand loyalty and hence they have more consistent revenue and earnings growth. They typically have a strong balance sheet and generally give high returns on capital. Because of these characteristics, they generally tend to have lower volatility in their stock prices. As a result, the consumption theme may have lower volatility compared to other thematic funds. 

In fact, the NSE consumption Index has historically seen lower volatility than other thematic indices as well as the NSE 500 Index. These factors help in endeavouring superior risk-adjusted returns.

What makes this NFO different from other consumption funds in the market?

Our approach would be more bottom-up stock picking rather than hugging the benchmark. If we look at NSE 500 Index, there are around 260 odd companies that can be considered for the consumption theme. Out of these around 200 are mid and small cap companies. As a fund house we already have a higher focus on mid and small cap segments and our large research team enables us to have in-house research on a wide number of mid and small cap companies which endeavour for superior stock selection. 

We believe that this, along with our focus on a longer term approach to investing will help in creating alpha in this space.

Why should distributors talk about HSBC Consumption Fund with their clients?

HSBC Consumption Fund will explore opportunities arising out of broader trends/themes such as unorganized to organized shift, penetration-led growth, emerging categories, premiumization and digitation. 

This underlying theme has the potential to generate faster growth than the overall consumption of the country. Furthermore, mid and small caps companies across consumption and consumption-related sectors also have the potential to grow at a fast pace and the fund shall endeavour to take advantage of this. Hence, the sustained earnings growth for the portfolio companies of the consumption theme may become higher than the broader market. Also, some of the consumption sectors offer consistent growth even in economic downturns. Hence, we may expect growth from this fund over the medium to long term.

Investors can invest in this theme through cost effective passive funds. Why should they consider investing in an active fund NFO?

Passive thematic funds tend to have a very high concentration on few stocks. For instance, NSE Consumption Index has around 64% weight in top 10 companies. Further there is a limit of maximum 30 stocks in the index. Selection of stock for the index is done largely based on free-float market cap rather than their investment outlook. These factors can lead to sub-optimal return over medium to long term. 

Being an active portfolio manager, we will follow top down and bottom-up approach for stock selection which will be based on company’s investment outlook. We will be actively tracking the companies and as their outlook changes, the same will be reflected in the portfolio. Further, we believe that consumption theme is broader based than what is reflected in the Index. Hence, we may take exposure to sectors that are outside of Index up to 20% of net assets and at the same time may have zero exposure to certain sectors which are part of Index. 

HSBC Consumption Fund
Thematic Fund - An open-ended equity scheme following consumption theme

* Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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