This week on Thank God It’s Friday, we spoke to A Balasubramanian, chief executive officer of Birla Sun Life Asset Management Company on the way forward for the Sensex after a lifetime high and the drivers that could take the market even higher.
Here are excerpts of that conversation.
Long-Term Outlook Positive
There are a lot of investors thinking that there could be some time-wise correction if not price-wise correction. Are you of that opinion?
A level of 30,000 plus on the Sensex is definitely a new high and it has come after a very long wait. If you look at the last three years, we had an expectation that the market will touch a new high. Now it has come, and that is something which you want to feel happy about. Second, while the index has moved up, it can continue to remain buoyant, market corrections could be here and there. It normally happens in every market that goes up. We will see some correction, and investors need not worry about it. The expectation on economic growth remains reasonably good. And therefore, the way we look at it is, it remains a buy in the longer term.
What are those triggers which will help market remain buoyant. You mentioned one of them is the economy?
I think from the government point of view, whatever they have been doing since the last three years, whatever they have been doing has to start reflecting in the numbers. One of course is the GDP, and second the industrial production numbers, that is happening from the government in terms of roads and other areas. We will probably see some success there, and that has to reflect on the industrial production numbers. Secondly, the government’s push towards low-cost housing, that could potentially could be the game changer for India. All put together, the overall expectation from the economy continues to remain good. Last but not the least, the stable rate scenario that we have been witnessing for the last many number of years. Even now, though, globally interest rates are on an upcycle, definitely from an India point of view we are definitely not seeing any upcycle till 2018. This essentially means a stable interest rates scenario for India, and therefore low cost of borrowing. This also means the topline could potentially grow. All combinations put together, the expectations remains reasonably good.
Shift In Savings Pattern
How can one play this theme of shift from physical savings to financial savings?
In the last few years, we have seen significant improvement in terms of flows into mutual fund asset class, especially in equity, is an outcome of incremental savings not going towards physical assets such as gold and real estate. Probably the trend will continue going much forward and I think that is something which we all are expecting in the mutual fund industry. In terms of existing assets, a lot of people have got locked up in real estate and gold. Gold is something, people don’t want to sell whereas real estate is something you want to sell but you don’t get liquidity when you go to the market for selling. As a revival is seen in the real estate market, that could be driven by low mortgage rates that we are seeing today. That could lead to improvement in the offtake for real estate as an asset class. Once that comes, once we see buying and selling in real estate assets...we’ll probably see people who are selling houses because they already have one or two houses, and therefore have to reduce exposure to real estate and to the financial asset class, and that trend, I think, should begin to happen in the next few years. But in terms incremental investments, we are already seeing a large pool of investors, are already considering the financial asset class, especially in mutual fund, as against the traditional way of saving money either in gold or in the real estate or any other mode of investing other than capital market assets.
‘Can’t Go Underweight On IT’
You have a substantial allocation to the information technology sector. For some of the companies, the guidance is relatively low than in the previous few quarters. On the whole, the valuations are cheaper. How would you go about dealing with the IT sector now?
IT is a bit of a dilemma because the company balance sheets are very strong, they are sitting on cash, therefore they have a high dividend yield. At the same time there are headwinds such as H-1B visas. There is also a change in the whole technology platform with fintech coming in. The traditional ways of building software applications are coming under a question mark. How each of these companies are evolving in the emerging space as well as the way the U.S. is looking at outsourcing software requirements is something we have to give some time to, before we come to a conclusion.
At the same time, Indian IT companies have played a very important role in the global space in the last many years and they have actually played a very vital role in helping the banking and financial services sector globally, as well as other sectors in the whole automation drive of the world at large. So therefore, the role that Indian companies have played in the technology space in the world at large, cannot be ignored at the cost of short-term noise. Therefore from money managers’ point of view, you can’t afford to go underweight. And given the fact that balance sheets are much stronger than we have seen in the past, that’s something we will have to live with for some time.
Private Versus Public Banks
Your fund continues to have high allocation or skew towards private sector banks. What have you made of the earnings that have come in so far?
On the lending side, we have seen continuous growth in excess of more than 18 percent, and retail credit has been pretty decent and mortgage lending has also been growing reasonably well. On the personal loan side, we have seen reasonable growth. Loan growth has been slow only in the corporate sector. The institutional investors and the corporate sector have not been big borrowers. The big borrowers have been looking at rising equity money to pay off their debt. We have been focusing on retail-oriented banks and non-banking financial institutions (NBFCs), and that continues to be our focus area. Going forward, earnings growth in these sectors, are going to be far superior than the larger headline numbers that we will see in the banking and financial services sector as a whole. Having said that, within public sector banks, wherever the balance sheets are bigger and the NPA worries are lower, and they have taken proactive steps to build a retail base, selectively we have been bullish as far as PSU banks are concerned.
Worst Over For PSU Banks?
Will we see disappointments when it comes to PSU bank earnings? The fact that the RBI had to come out with a asset quality review part 2, of sorts, probably suggests that the worst is not yet over, or at least it’s not been recognised and provided for.
That’s precisely why we still take a cautious stance as far as public sector banks are concerned. The new provisioning that can potentially come around sectors like telecom, and how that is going to have an impact. Secondly, how will some of existing recoveries that we are seeing come faster than what was expected earlier, there are some question marks around that. So from a public sector bank point of view, these are some of the thing that are a hanging sword to take a larger bet and see how this evolves, and see the inflection point and take a call on that. As a fund house, we have been very agile to this kind of emerging trend, looking at the balance sheet, and how they are building the business.
Real Estate Picks
How are you viewing the real estate sector where we have seen some gains recently?
RERA will benefit consumers or buyers at large. Then comes the manufacturer. Any company which is a well-run company, with an institutionalised format, has survived for many years, that’s the kind if company that will continue to survive and remain one of the bigger players to operate in the market.
From the mutual fund point of view, even if you own certain stocks in the sector – and we do have certain real estate stocks in the portfolio – they can’t form a big portion of our portfolio given the fact that the sector is itself very small in the listed space. But definitely the sector, and especially the companies which have large commercial real estate, commercial space which is currently rented out, especially with the REIT coming in, some of the companies will be able to encash some of the REIT opportunities and improve the balance sheet further, and grow the balance sheet further. And these are some of the companies as long as they are in the listed space , as a fund houses we are not averse to looking at these companies.
Playing The Consumption Theme
What’s the best way to play the consumption theme now, and what is your order of preference – auto, consumer durable, staples, or even NBFCs.
I think the best way to play this entire segment is through the diversified equity funds, we call it the multi-equity cap fund. Second way to play this theme is to look at banking and financial service funds – Birla Sun Life Mutual Fund has that product – so look at that as a product which is basically playing through the consumption theme, as well as through the infrastructure theme. One of the things that investors can always consider is the banking and financial services sector as a proxy to not just the economy but also a proxy to the retail earnings growth that you are seeing in the country.