What are your fund managers doing right now? Are they making use of the current rally to raise some cash or has the so-called summer correction come and gone?
The money managers have been quite busy in the last few weeks, tracking the performance of companies. The quarterly results have been coming out. I see some kind of confidence coming back. Most of the portfolio stocks have come out with good results, especially the holding that we have in the consumer driven companies are coming out with reasonably good numbers.
Some of the banks are showing good numbers and there is a strong feeling that the worst is over, especially around the NPAs. The way the resolution is coming, the way the stocks are performing in the banking and finance sectors, is actually building back the confidence which was a missing piece about a quarter back when the entire market was coming down.
The market was divided in two parts; five stocks were driving the whole market and the rest of the stocks were going in the other direction. As the results were better than expectations, I presume confidence is coming back.
Five stocks which were driving the market. How many of them do you own?
We own all those stocks. We always have this question in mind, do we own sufficient number of stocks?
Is it time to diversify out of that list of five names or should one have a greater allocation in mid and smallcaps because whenever the rebound comes in, the highlighted earnings are beginning to see those yellow shoots emerge. Perhaps the beta would be higher there?
If you look at the last five years, your portfolio has been constructed with high beta stocks with a large proportion of allocations coming from the mid and small-size companies, may be the Next Nifty50 kind of companies. Your outperformance to the index would have been substantially higher. That is the way the money managers have been operating in the last so many number of years,
That is why the Indian markets also have been rewarding the investors in the market. But the last six months have been a bit unique and the diversion was created from a portfolio point of view.
If you have to correct your portfolio, what remains actually is the slip between the cup and the lips. It is more about what are you owning sufficiently in your portfolio to have outperformance. The case in point is some of the large stocks. You need to have them as part of your diversification. But if you have to have it according to index weight, portfolio managers do not do that because the most of the allocations create an alpha through owning the stocks which have got a relatively higher beta. But the rate of growth for those companies have been far higher than the largecap companies.
Do you believe that broader markets will play catch up or do you think outperformance will remain with the benchmarks and the Nifty 50 names?
Yes, this is why I mentioned earlier that the confidence is coming back. The performance of companies now is turning out to be a little better than what was being expected and again it is coming not only from the index companies, it is coming from a wide range of companies, from the broader market.
Most of your funds have a high weightage in the banking and financial space in general. What convinces you about the banking sector? While NBFCs, some of the regional banks and private banks have done well, there are still a lot of names out there, especially PSU banks and corporate banks which are lagging.
Yes, as a fund house, we have been extremely bullish on the banks that have got very high focus on retail loan growth. They have done extremely well. At the same time, we also feel that the way credit growth is coming back and the banks are getting back their confidence about lending to the corporates. Actually, the corporate lending also will start picking up. We have turned our bets a little bit more on the corporate banking as well. The banks have been focussing largely on wholesale banking also. We have turned a little bit positive.
What are you seeing in the data to give you the sign that things would be turning around at a time when SBI still reported a loss. They are saying things may look up in the future. With the rates going up, the whole appetite of lending by corporates may be measured?
It is coming from two sides; one, the incremental demand for borrowing is not coming from corporates for setting up a new plant. The incremental demand is coming for corporates either for M&A purposes or for refinancing existing loans. Given the fact that one segment of the banking industry is cutting down their lending activities, another segment of banking sector is actually increasing their lending book.
The differential approach of these two banking systems is benefitting some of the banks which have got an established credit appraisal process. The credit underwriting capacity has been far superior to some of the banks which have been on the public sector side and that actually is benefitting some banks which are on the corporate lending books as well. This is the trend change that we are seeing.
Second, on the NCLT, we are confident the way the things are progressing after finding a resolution for at least three companies, including the Bhushan Steel which got finally closed. Something seems to be increasing the confidence that worst could be over for that.
But having said that, the way this is being projected is that as we move forward there could be some more provisioning. We also draw a line. Those sectors which have been built for the purpose of building long-term benefit of the country like power sector, has to also find a solution. There seems to be some steps that are being taken by both the government as well and the intra credit arrangement that the banks are working on to find a resolution without actually going to the NCLT as well.
Assuming they are able to fix those problems on different methodologies, then everything will not be piled up on the NCLT.
Are markets getting slightly complacent because nobody is reacting to an impact of interest rate hike? Nobody is talking about what is happening to the trade war and how the world global trade would move? It reminds me what happened in 2007 when the subprime problem was discovered and the markets reacted to that problem after eight, nine months in April 2008.
That is a good observation. However, if you look at the last one year. the markets have been consolidating and the last five years, we saw a good bull run and last one year has been bad except the index has done better than the rest of the indices.
But there has also been a severe correction, though it is not reflecting on the Nifty or the Sensex. Broad markets have given a correction. This year, the monsoon has been pretty good and the agricultural growth is likely to be better than what has been the last years trend. Also, inflation has been largely under control. The risk has come from oil but oil is also settling down at close to $68-70.
The currency is reacting in line with what we are seeing in the emerging markets. Emerging markets have been going through a tough time, as has been Europe where we have seen fund outflow.
On all these factors and macro point of view, India remains reasonably insulated. That is one of the reasons, it is reflecting on the markets stability. At the same time, GST is now settling down and tax collections would be better than what we have seen in the past.
In totality, there are few areas where we are showing an improvement and few areas where we are seeing deterioration, especially on macro variables on current account deficit as well as on currency movement.
Which is the one scheme or one asset allocation that could work for the next 12 months? We will be dangerously close to the election verdict. Does it make sense to buy balanced funds rather than equity diversified ones? Does it make sense to put 25-30% of the money in debt rather than equities?
Whenever we have seen this kind of volatility, there is a flight to safety. The flight to safety in case of equity has to be in the name of a balanced fund or consumption driven companies. That is one way of hiding yourself. Do not take a bet on the market volatility, do not go against the trend.
Second is the fixed income. As yields have gone up, one of the big opportunities for Indian investors is that bond yields have gone up in the last few years. Therefore, some allocation can go towards fixed income which can give a better experience to the investors. Also, longer term investing especially through the largecap companies a little later.