Generating Alpha Depends On Right Sectors, Right Stocks

Elections and market upheaval are almost always intertwined. Therefore, the outcome of the upcoming polls could impact markets but only for the short term, as it will not affect India's long-term structural reforms or growth agenda, A. Balasubramanian, CEO of Aditya Birla Sun Life AMC, says in a conversation with Money Today's Renu Yadav. Edited excerpts:

By Renu Yadav  
Tuesday, March 5, 2019

How will equity markets perform in CY2019?

It looks better than 2018 given the improving macro picture such as easing of oil prices and stable inflation. With oil prices slipping and the rupee firming up, the Indian economy stands to benefit by managing its twin deficits - budget deficit and current account deficit. The IMF also maintains its positive outlook on India on the back of stable macroeconomic policies and various structural reforms bearing fruits. Earnings will recover as well. One also expects the Goods and Services Tax (GST) to stabilise and a further reduction in tax rates. This will boost consumption and increase the overall tax base. There will be some volatility going ahead, but the broader macro picture and domestic growth prospects are strong, and that augurs well for equity markets.

SEBI has approved side-pocketing. How will it benefit investors?

It is a good move by SEBI. Mutual funds (MFs) are one of the largest players in the Indian bond and credit markets. They are currently managing close to `15 lakh crore and investing in a variety of fixed-income instruments. During times of stress, MF investments in bond markets may face the risk of credit default. When that happens, creating a segregated account for such assets is the right thing to do to keep the rest of the portfolio safe. Moving these stressed assets to a segregated account along with corresponding customer units should benefit people whose money gets locked in default situations. Investors with outstanding units at the time of default could get better redemptions in the long run as and when the recovery happens.

What about interest rates?

We expect interest rates to remain stable given the recent fall in oil prices and inflation. Food inflation numbers are down as agricultural commodity prices are falling, and this may induce policymakers in keeping rates stable to low. If oil prices remain low for some time and the growing sense of slowdown continues in the US, one can expect interest rates to remain steady to low in India.

What will be the impact of expense rationalisation on fund houses?

SEBI's new regulation will come into effect from April 1. As this is a new normal for the industry, all players will have to rewrite their business models and revenue models will be reset accordingly. Given the fact that the MF industry will move towards a full trail model of commission (instead of a one-time upfront commission), its impact on profitability is likely to be limited. At the same time, growth in fixed incomes and scale building in AUM should help improve absolute profit over time.

Will it require more efforts from fund managers to generate alpha after MF reclassification?

Recategorisation provides well-defined investing parameters along with clear mandates and standardised mechanism, which could help increase the accuracy level in forecasting and cap downside risks. Managing portfolios and generating alpha are not just based on market cap investing; they require stock differentiation and individual capability - the capability to select the right sectors and the right stocks. Recategorisation also helps understand the funds and their management better.

Equity and debt markets are likely to remain volatile due to general elections. What should investors do?

Yes, poll outcomes could play a crucial role but only for the short term. Previous market performance analyses suggest that returns for the six months (a combined period before and after elections) have been positive. Ultimately, it depends on fundamentals and strength of the economy. Irrespective of poll results, India's economic and growth agendas will not change. Also, long-term structural reforms such as GST, RERA and IBC will continue to deliver the desired output regardless of the political environment. So, one should continue to invest with a clear, long-term goal in mind and should not be worried about short-term fluctuations.

What are your takeaways from the recent NBFC crisis?

Risk management would be key to success. Recent fluctuations in the NBFC sector are part and parcel of the financial market; they do happen once in a while. Therefore, staying focussed on portfolio exposure and risks associated with such investments would remain at the forefront while managing money.

MF inflows have been good over the past two-three years. What do you expect in 2019?

The industry should continue to grow this year along with sustained inflows. As of now, the dominant share of flows into MFs are coming through SIPs. Moving ahead, asset allocation will be key to MF success and the industry will evolve around it. Also, there is a huge untapped potential. According to the RBI, nearly `69 lakh crore is lying in fixed deposits across banks. We have the scope to promote conservative fixed-income products to these investors as these generate not only reasonably better returns but also provide tax benefits. This could help increase the industry AUM and bring on board a significant number of new customers.

@renuyadav08

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