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Stock Picking Will be Tough

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Stock Picking Will be Tough
Narayan Krishnamurthy - 27 September 2017

An interaction with A Balasubramanian, CEO, Aditya Birla Sun Life Mutual Fund is full of anecdotes and packed with information, given the speed at which he speaks. In this interaction with Narayan Krishnamurthy, he chats about the markets and what he sees as the future of money management.

You have witnessed several market cycles and each time there has been something unique. What is unique this time around?

I would not get into the unique bit, but a lot of incidents are occurring around us and the collective impact of these developments are driving the markets. Most importantly, there is a sense of optimism, which is very necessary to sustain stock market growth for considerable period of time. There have been few transformations in recent times like the demonetisation and now the implementation of GST. Both these transformations have far reaching consequences that have a positive impact on the markets, which is what is driving it.

We are also in a scenario when interest rates are down, inflation is down and the equity markets are stable. Normally, it is weak currency that gives away first and is indicative of the pain that is going to strike the economy. The currency is stable right now which is a positive sign for the economy and the stock markets. Similarly, if you look at the monsoons, it has been somewhat mixed in the past two years. Ideally inflation should have shot up, but those who hoard and cause a rise in inflation are being taken care by the government. Today, people are afraid of hoarding, which has not impacted inflation in an adverse manner. There are plenty of genuine and sincere steps taken by the government which are working out well. I feel the impact of all these collective factors is the difference this time.

What about the concerns over valuations? What will drive the economy?

Doubts over valuations creep in even when the markets are down and there is a lack in terms of economic growth. Yes, valuations seem to be high, but there are equal opportunities to explore even now. The concern is over earnings growth, but there too, there are no undue surprises.

I see green shoots with a consumer driven economy, especially since rural economy is doing well, state governments have increased their spending, the seventh pay commission payouts is leaving more money in the hands of the people. If you look at car sales, it is rising. There are several other indicators that point towards a consumer driven economy. Just look at the airline traffic, increase in tourism and the spends on consumer goods like ACs, and also an increase in the metro rail construction activity across the country. The only segment witnessing less activity is construction sector. Then there is the NPA issue with the banks, which will find a solution.

What about stock picking now?

Without a doubt stock picking is becoming tough in the current scenario. The fund manager’s job is not going to be easy. They will have to look at sectors that hold least of surprises. They will need to closely examine the balance sheets and look at details to know which companies are clean. They may also face surprises from the markets with the way things are changing around us. Therefore, the discipline of investing will matter, something that I have been advocating with my investment team. They will have to work towards possible outperformance compared to the benchmark for every fund category and do it consistently. Your maximum calls should be right, as you will still commit mistakes and learn from them. But, the fear of committing mistakes should not put them in an extremely safe mode.

So, are fund managers geared to manage the rising inflows?

Yes, we are geared up for more inflows. The rising cash inflows into mutual funds will remain. What we need to see is how this inflow will be consumed. One way is through IPOs and another is through disinvestment in the form of the ETF route that the government is working on. There is one more route, which may play a role—the foreign investors reducing their holding, because I don’t see domestic investors reducing their investments at the moment. As asset managers, we are geared up to manage the inflows, because structurally the concept of SIP is in place and it will keep going up.

A lot of initiatives have been undertaken by the government. What is holding back the impact of these initiatives in the markets?

There is a lot of scope for spends in infrastructure development. Several state governments in recent times have started to increase their spending. The impact of these spends will take a few more years to show results. In fact, the demand on residential real estate is not visible despite fall in interest rates and push by the government. Once this picks up, it will also help increase in employment and economic pick-up.

Real Estate Regulation Act (RERA) is a new baby, which will take a while to settle, but it is good for the consumer. It will take some time, but its impact is definitely something to watch out for. Right now the price imperfection in real estate is the cause of the sector not picking up. Once this mismatch is corrected, you will find that even this sector will contribute to the economy and markets.

nk@outlookindia.com

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