ETMarkets Fund Manager Talk: This asset manager recommends increasing equity allocation as India story remains intact

How do you expect equities as an asset class to perform over the next 6 months? What are the major downside risks?
Over the last 18 months, we have traversed through an economic phase where globally, two other large asset classes i.e. fixed income and gold, have become attractive vs equities. Fortunately, India has gone through a period of consolidation with no significant price correction as growth was still intact, resulting in valuations becoming very attractive.

We, too, have witnessed a reasonable slowdown in certain pockets of the economy. Still, at an overall level, India will continue to see 11-12% nominal GDP growth, and one can expect similar returns over the next 6-9 months.

The key downside risk we need to monitor is how many downgrades we can see on the back of the global slowdown until we continue to be in a high-interest rate and tight global liquidity regime.

How much AUM do you manage, and how have your funds performed in the last 1 year?
As of February, the fund has delivered absolute returns of 28% since its inception in Apr’21 and currently has Rs 600 crore of AUM.

The performance has been in line with the fund’s stated objectives of delivering an alpha over the benchmark over the long term while cushioning the downfall during wavering, volatile markets.

Over the last 1 year, the fund has outperformed Nifty and other major indices by 8%. Compared to equity offerings like large-cap mutual funds, this outperformance increases to 9%+.

This performance has come at a time when 75% of the large-cap MFs have underperformed the benchmark.

Recent data showed that many MFs have increased their cash holdings amid an uncertain market environment. What is the percentage of cash you hold today vs 6 months ago?
EDGE is a long/short equity offering where we actively manage risk through hedges or by reducing our overall exposure with an aim to cushion drawdowns during uncertain times such as these.

Given this differentiated strategy, EDGE is an ideal complementary allocation to an investor’s long-only equity portfolio (including this type of exposure to MFs) and a better way to participate in equity markets.

We have been cautious since November last year due to global risks and expensive valuations and, therefore, reduced our net long exposure to almost 74%. This stance has helped us limit our drawdown by nearly 32% vs benchmark indices.

The Nifty 50 is currently trading at 20x its trailing valuations for FY23. Which sectors or pockets look attractive and offer buying opportunities?
Nifty 50 is likely to end FY23 with EPS of Rs 800, therefore at 17100 levels, it is trading at 21x (trailing).

The banking sector will be the most significant contributor to incremental Nifty earnings in FY24, but because of heavy FII selling, most private sector banks are now trading at below-mean valuation.

We expect most of these banks to report fairly robust growth in the next 2-3 quarters, therefore, it offers an excellent entry point.

Additionally, we are also positive on sectors like cement which is likely to benefit from falling crude prices and continued focus on infra spending.

We also believe that IT may no longer be a defensive sector in light of the slowing US economy and therefore, pharma should do well mainly due to relatively cheap valuations.

As we enter a new financial year, how do you expect it to pan out for markets and what kind of portfolio allocation will you recommend to retail investors?
We are going through a global slowdown, tightening liquidity and a very high interest rate environment. However, once inflation starts easing materially over the next 3-6 months, things will turn around very quickly.

Investors should, therefore, use this time to increase their equity allocation and have an appropriate split between large and SMID as per their risk appetite.

We strongly believe that markets will be much higher from current levels by the time we approach the central election period in May ’24 because of a rebound in economic activity and lower interest rates.

Equity inflows have so far been positive despite the market volatility, but do you expect this trend to continue unabated and why?
Nifty returns have been fairly muted in FY23. Despite that, we have seen net equity inflows to the tune of Rs.2.2 trillion – which is almost equal to what we saw last year. Retail SIP inflows have been robust post covid and are now stable at $2 billion/month.

Naturally, such inflows represent an ongoing structural positive for the stock market and can continue as households’ allocation to equity in India is still very low.

What kind of asset diversification would you recommend investors today keeping in mind the overall risks and the plethora of opportunities?
The domestic demand story in India certainly remains intact to justify the continuing belief in the equity market, underscoring the importance of equity investing as the best way to grow your wealth.

Times like these should be leveraged to increase one’s allocation (60-70%) and take it to optimum levels to suit one’s risk appetite and financial goals.

Having said that, for conservative investors, debt is also now offering good returns, and one can look to lock in that allocation for the long term.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)