How to identify pockets of safety in a volatile market

Given that the size of the mutual fund industry is close to about Rs 11 lakh crore, Rs 3,000-4,000-crore redemptions per month is not very significant, says A Balasubramanian.

ETMarkets.com
A bit of risk-on trade has been prevalent for the last six-seven months driven by high liquidity and the TINA (there is no alternative) factor as interest rates were pretty low, says A Balasubramanian, CEO, Aditya Birla Sun Life AMC

There are fears around the second wave of the virus hitting the world. London is getting into a lockdown over the weekends and that sure will be rattling the markets.
Having seen a significant run up, there are events to watch out for as we move forward. We are only three weeks away from the highly expected US election outcome and also Covid-19. In India, the number of cases has been reducing for Maharashtra and a few other states. But there are countries globally where we have seen a resurgence in the number of cases. I would assume that this trend could exist in most countries and that is being expected by most of the experts across the world.

But the one event that everybody is looking at is the outcome of the US election and how it impacts the second stimulus, how they are going to manage the fiscal issues and also how the global currencies are going to behave. A bit of risk-on trade has been prevalent for the last six-seven months driven by high liquidity and the TINA (there is no alternative) factor as interest rates were pretty low. At this point of time, the correction is largely on account of that and in my view that is always good because when fundamentals are still to catch up, these kinds of corrections always bring in the necessary balance to the market and weed out the fence players so that a bubble is not created with stocks continuously going up.
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The big talk in the market is that while IT is a great bet long term, in the near term, it may be time to move out of IT and pharma and go for banks or infra plays. Do you agree?
Undoubtedly, this is an interesting trend. As a fund house, our own research teams identified pharma and IT at an early stage. These two sectors will be the significant beneficiary post Covid. .So, a) because of the increased focus on health and; b)the whole digital technology is going to play a role in bringing in high levels of automations and the need for upgrading the technology capability of most of the organisations, IT and pharma stocks have been running up.

If GDP growth comes back and spending takes off, then credit starts picking up naturally and banking as a sector should do well.

-A Balasubramanian


At the same time, one has to also look at it in the context of the overall growth expectation for the economy and within that the sectors that can deliver better performance within the constraints for the overall economy. In that context, pharma and IT balance sheets are strong, with no leverage at all. These are high cash companies and these companies continue to grow at at least 12% to 15% growth. This is substantial and higher than the nominal GDP growth. That being the case, the ownership and focus would remain with them. Volatility is a function of the flows that come in the form of ETF flows and so on. One should not get too worried about the volatility, given that these sectors have got a longer term sustainable model.

Having said that, the financial service sectors have become attractive from the valuations point of view. We all perceive the banking sector as a proxy to the economy. So if GDP growth comes back and spending starts happening, then credit starts picking up naturally and banking as a sector should do well. In the absence of all these factors, to what extent they can become a screaming buy is something one has to see it. But having said that, within the space, our company will become stock specific and more bottom fishing.
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Right now the mutual fund industry is getting criticised for underperforming the index. What is the plan for making a comeback?
When I used to be a money manager, this challenge always used to come for most of the money managers at intermittent time periods. Definitely in the last two years, a significant overweight in certain sectors and stocks created that kind of underperformance for money managers. Not just only in India, even globally, most of the money managers do not own FAANG stocks as much as they are in the index. Therefore, they are underperforming when the broad market stocks are getting battered.

Naturally, the money managers tend to look for companies that can potentially deliver better returns than the index performance. The money manager’s focus will always remain on the whole industry even for us, remains more on bottom-up stocks finding that you try to do other than Sensex and Nifty companies. Having said that, one has to own sufficiently those Nifty and Sensex stocks which have got great value to be generated for shareholders. Though one cannot own the entire index given the regulatory limits in which we all operate, it is not a constraint given that market breadth is very large.

In the last six months, the small and midcap indices moved up almost 2.5 to 3 times than Nifty and Sensex. Though it is too short a period to take it, that is the power of the sectors. When things get better, the power of these stocks to give outperformance to the broad market or Sensex or Nifty is substantially higher. That is the way it has performed historically. That is what money managers will focus in terms of giving outperformance and it is not just India, this is a global trend and the US has gone through this between the active money managers and passive money managers.

The active management has still got 50% of the industry size in the US given the fact that the concept of generating alpha through an active management remains one of the strong cases for investors to keep their confidence, still not done.
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There is a view in the market that DIIs are getting redemptions on a daily basis because compulsions are forcing them to sell stocks which they would have not sold otherwise?
Since the time Covid happened, the redemptions kept rising but the market fell in March and it is a known fact. That shook everybody and most of the investors, including the policy makers across the world and India lost confidence. We saw some redemptions coming in as the market started picking up. For one or two months, we saw the rate of redemptions rising and then we saw it coming down in September.

This is actually a function of the past returns on the basis of which investors are trying to either move out or adjust their portfolios to get into better schemes. Given that the size of the industry is close to about Rs 11 lakh crore, Rs 3,000-4,000-crore redemptions per month is not very significant. Given that we have seen a huge amount of volatility and the market has come back quite smartly and sharply, it is bound to be there.
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We have seen this cycle in 2008-2009 also. It exists for some period and then people start realising the TINA factor and ultimately from investors’ point of view, if they have to take a call on whether to sell equity or fixed income or any other asset classes, the options remain very limited. Actually it makes you think about coming back to equity, keeping in mind that longer term, equity as an asset class does well. And that is the way I think the cycle will behave.

At this point of time, coming to the rising trend in redemptions, at least October was lower than September, September was relatively at par with August numbers and that is something actually going down. Some NFOs good collection is coming in. Mutual funds have got only about 2.5 crore unique investors and in a country with an investable population of 30 crore. This number is very small and therefore many new investors will start coming into the mutual funds once things stabilise.
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