Further, A Bala says that though SIP cancellation would be there, the net number is positive and we should not worry about it.
In the second half of 2023, markets will start talking about elections, what will happen in May 2024. That narrative will start.
I will go with the past trends. Election has always been a big topic of discussion for a variety of reasons. There is a wider belief that pre-election there will be a pumping of money into the system for building infrastructure. Fortunately, this government has never done anything just because the election is coming and therefore they need to do something different. They have been doing it as a work in progress, business as usual manner. Around the year, they have been building the whole economic model to the next level.
Therefore I would assume the election-led outcome would be more on the positive side rather than the negative side. It can give a positive twist to the market given that once the election is over, probably for the next five years, we will be marching towards a $5 trillion economy and we will also be marching towards making the Indian economy number three in the world. All these things will probably shift the attention from the global market towards India as we come close to the elections and then beyond.
Does the exposure to cash levels that you are sitting on now increase given that you are cautious and expecting more volatility?
The way money managers operate is to go and park themselves in stocks which are less volatile and will not have less earning negative surprises at the same time less the downside. Basically all the consumption driven companies would be the one of the segments in which one can go and hide.
But in addition to that, from a cash flow point of view, money managers generally do not take big cash calls, which is normally in the range of about 4-5% and not more than that.
You are suggesting consumption as one space to hide. Is it coming from the fact that it is better to be with domestic cyclicals rather than export facing sectors like IT and pharma?
Domestic consumption looks to be on the uptick and per capita income levels in the country have been rising and that definitely will lead to increase in consumption. Also, this time, the Rabi crop has been far superior compared to the last few years. Therefore, the rural economic activities are likely to pick up.
The downside risk on the consumption side seems to be limited and probably one would have a positive outcome coming from the segment. From IT as a sector point of view, we have to look into exports in two parts; one is IT exports and second is non IT exports. Clearly, IT remains an integral part of the global market and balance sheets are clean and stocks have corrected and globally all technology companies have corrected quite significantly.
Indian IT companies also got corrected quite significantly. Therefore the valuations become attractive and the clean balance sheet with high cash levels in the books and high dividend distribution so on and so forth. That segment could also play in our own belief as a contra play.
What about the outlook on the overall private capex? We have seen that policy impetus as well coming through has been government spending? In light of all of this, are you looking at a decent pickup in private capex or have you witnessed that?
We are already seeing some element of positive momentum in this, especially companies that have been announcing private capex in the last few months, has been on the rise – whether it is in local manufacturing, like paint industries where a lot of people have announced capex. It is just a question of time. What we have seen in the last year is that after the PLI schemes were announced, we saw significant announcements coming in the auto space and auto and auto related space.
We will probably see a similar trend emerging. I think most of them do not hit the headlines because they are not in $5 billion, $10 billion kind of private capex, but in the range of about $1-3 billion. Many companies are actually undertaking that. Therefore, I would assume PLI led private capex coming in and also the existing capacity being expanded in certain sectors where the demand for the materials continues to remain very large, whether it is steel or cement. Those are sectors where we are also seeing capex being announced. All of us are preparing for the demand supply situation to change in the next few years.
The USP of India has been that FIIs are selling, domestic institutional investors are buying. We are buying because there are flows which are a function of SIPs. The SIP cancellation ratio which was reported last week is at a multi-year high. If this cancellation number is strong, that means for the second half of this year the flows will also decline?
Cancellation is actually a function of the market sentiment and it is a business as usual kind of thing. The normal ratio in cancellation is roughly about 30-35%, every time, there is nothing new actually. People are just looking at the number and then saying SIP cancellations are high.
Historically, one can look at the SIP number in two ways. One, how many people actually keep on buying SIPs. That is called SIP registrations, that is a gross number of new people. Even existing people increase their SIPs, depending on the market and we call it as step up SIPs. There are also step down SIPs, the people who are negative or have built enough book on SIPs. They also cut down their exposures.
Also, given that fixed income is also equally attractive today compared to the debt, given the interest rates are high, there will be a set of people who will be moving towards fixed income as well. So, it is a function of the rates, the function of sentiment and also the function of how business actually is and how the book is being built.
So you do not see a drop in SIPs?
Yes, if you look at the trend, the SIP registration numbers have been going up. Though cancellation would be there, the net number is positive which is what I think is the case currently. We should not worry about it.
In the last two years, returns for an SIP investor and for equity investors have not been very gratifying. They have been negative to flat. Typically, while we may all think and talk long term, what we actually do is short term. Given the last two years of performance by equity diversified schemes and by equity markets in general, is there a fear that SIP culture could get challenged and SIP cancellations increase, thereby impacting on net inflows?
On the incremental flows, I believe we will remain positive and this will be in excess of close to about $1.2-1.3 billion, Rs 7,000-8,000 crore of net inflows.
It is the AMFI data or is that your own estimate?
My own estimate, not AMFI estimate, not Aditya Birla Sun Life Mutual Fund) estimate. My own feelings on the basis of my past experience.
So the flash should not say Birla AMC, rather Bala says.
On the basis of my past experience, I think flows will come. The trend to accept mutual funds through SIP investing has now become the widely accepted principle. And second is return driven SIPs has gone down quite significantly. It is all goal driven SIPs that have gained popularity and will continue to remain so. But the return being negative, historically, whenever the market turns volatile, we have seen one or two years of dull period.
When it comes to the question of returns, naturally people have some kind of question mark but that question mark has gone down quite significantly, given that people anyway look at the future, the purpose for which they are saving. It is a mix of these two things. Therefore, my own belief is SIP cancellation is not something one should worry about . It is a function of the market. It is not going to create a negative trend as far as the Indian equity flow is concerned.
In terms of your exposure to Adani Group of companies, debt exposure, and also for the mutual fund industry per se, has there been any kind of default, any problem whatsoever?
Absolutely no. On the contrary, whatever exposure that we as a fund house had in Adani Group of companies, especially in CPs, have been paid on time and in fact, some of them have actually been paid even before the due date.
So, the Adani Group has honoured all their debt commitments?
Absolutely yes.
That is for AMC and that is even for others?
For the entire MF industry, banking system, entire finance services industries, whatever the outstanding that was there in the form of bonds from Adani Group, all have been paid on time and some even paid before time.
And what about NBFC exposure to loans against shares and other instruments?
I think everything has been paid.
I have seen multiple credit cycles and this is the one cycle where despite a lot of fear, it has been managed so nicely, given that exposures were well controlled either by the mutual fund industries or by the banking industries, thanks to the regulatory framework that is there. Whatever exposure was taken by the companies are also manageable even from their own perspectives. Therefore this time around, though the equity market reacted for a variety of reasons, the bond market did not react and did not create any fear in the market on the potential of any credit market crisis.
The entire thing was backed by very high prudent norms which everyone would have applied. Look at this AT1 bond of CSFB which is currently coming. India is far ahead of the curve when it comes to the question of recognising the risk associated with AT1 bonds in the past and in fact the mutual fund industries put the responding system so fast thanks to the SEBI as a regulator starting to ask questions on the exposure to the AT1 bonds in the past.
Today the Indian finance system is very much under control when it comes to the question of any investments, any bonds which are risky in nature.
