A Bala explains how dialing up risk and taking a leap of faith paid off
, MD & CEO,
ABSL AMC
, says with credit growth anticipated to fuel increased spending, the Indian market's high PE multiples necessitate a 'leap-of-faith' approach. Fund houses, cautiously optimistic, are
dialing up risk
, driven by the desire to avoid incorrect predictions rather than outright bullishness. One fund house has been successful this year by taking calculated risks.
It has been a good market locally and globally. Gold, silver, Bitcoin, NAV of mutual funds, everything is at an all-time high. Where do we go from here?
A Balasubramanian:
It should remain positive for multiple reasons.
When were you bearish last actually?
A Balasubramanian:
I have never been bearish. If I had been bearish, I would have never made the investment in the market.
Okay, so you are bullish. Now what should one do?
A Balasubramanian:
The way things are shaping up with respect to international developments right from geopolitical risks to tariffs, we are seeing some kind of direction coming in, which will be more positive rather than being negative, that is one.
Second, within India, the growth is gradually coming back, supported by increased government spending. There has been increased spending coming from the private sector as well. Third, the Reserve Bank of India has been fully supportive of keeping the interest rate low and they are doing everything that is possible for the financial service sector to actually improve the overall credit offtake in the marketplace as we move forward.
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So, if you look at the whole environment, it is helping the growth come back. Inflation largely is under control. Broadly as the spending starts coming in, we probably see the numbers for companies getting better, and therefore the earnings outlook will get better. When I look at it on a cost of capital basis, today with interest rates at where they are, the cost of capital in India is the most affordable and anybody can build a business with reasonably good predictions in terms of what kind of margin they will make in terms of ROE. So, we are in a good sweet spot.
The fiscal deficit is largely under control, which again gives more room for the government in case they want to put more money in the hands of people, and that will lift the whole economy. With the recent announcement coming from the government creating first time employment, it gives some kind of income in their hands which again encourages people to seek employment and that is the way the whole momentum will get picked up.
We are in the right direction and markets have already consolidated quite nicely for the last almost six to nine months and we have weathered around all the volatility that hit the world quite successfully. My own belief is India is getting a little stronger so to speak. The only risk is something, which was always there – the Chinese economy is coming back quite nicely and therefore there will always be question marks in terms of how the flows will come from overseas market to the emerging market and within that, what share will come into India. These debates and question marks will always remain, but otherwise, the domestic economy driven by domestic consumption should be the major driver.
But how many of these positives are already in the price? We are just two to three odd percent away or at an index level from the all-time peak. Do you not think that this is already all baked in by the markets?
A Balasubramanian:
The positivity, of course, will continue. It reflects on the mutual funds, the overall participation in the equity market reflects that given the past trends that we have seen, despite all the uncertainty that came in, India behaved quite nicely from the overall market perspectives. So, that being the case, I would say, it is already priced in and to some extent is getting discounted.
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But still no clarity has come in terms of how the earnings will pick up. Where it stands today is, nobody wants to take a call in terms to what extent earnings will start showing an upward trend and even analyst predictions have not been very clear. Today nobody is able to gauge what the real impact will be on the interest cost saving which has been one of the lowest in the country, to what extent home loan rates will drop and therefore more demand will come.
So, these predictions are not being made currently. There has been a bit of a sluggish period in auto sales. But we also need to take into account agriculture. The monsoon has been good, the rural economy continues to do very well. And the government is pushing quite a lot in terms of rural India focus and therefore all these things will actually lift the income in the hands of people.
As credit starts picking up, it will increase the money in the hands of people, and therefore the spending will start coming back. This is a question of time and nobody wants to, of course, at this point of time, predict that India is still trading at 20 times, 20 times PE multiples. So, one has to take a leap-of-faith call and hope nothing goes wrong as nobody wants to go wrong. Today it is not about wanting to be bullish, it's just that nobody wants to go wrong by making wrong predictions. That is the way people must be reserving their say judgment, bullishness, and upping the earnings growth without confirmation coming from the companies themselves.
But in your
MF schemes
, are you all in or are you still sitting on some cash?
A Balasubramanian:
No, cash will be about 3% to 4%. We are fully invested. In fact, as a fund house, we have been quite successful this year in terms of being bullish. I still remember my CIO equity just about eight or six months back said now the time has come to dial the risk, which is nothing but putting your leap of faith back on the table and taking a bet and that is the way we have done it as a fund house.
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