Hybrid funds the way forward amid soft macros and valuation reset: Vetri Subramaniam

Time of India

02-05-2025

"Very hard for companies to take a call on where to build capacity, how to build capacity when you have got so many moving parts," says
Vetri Subramaniam
,
CIO
, UTI AMC.
When there is madness in the market, he will always come out and say market mein kuch change nahi hota hai. Madness and fear is always part of what is happening. I think April we have seen madness and we have seen what really could be called as a magical comeback. First everybody thought that nothing in the world will go right when the tariff started rolling in. Now, everyone is saying that nothing in the world will go wrong because sanity has come back. So, what is the right way of looking at the world first and then markets after that?
Vetri Subramaniam:
I must admit that not the volatility, because I have seen more volatile markets, but the news flow which sort of disrupted everything that we know about how economic policy and economic affairs have been conducted across the world for many decades now, certainly all of that suddenly came undone literally overnight and then we have seen multiple attempts back and forth.
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But without going into too much detail because honestly, we still do not know what the final destination is and where the US policy and where China itself will be able to readjust their thought processes, the bigger question is all of this really creates a lot of uncertainty. The biggest victim of this uncertainty will be corporate capex and I am not referring to India, I am just referring to across the world.
Very hard for companies to take a call on where to build capacity, how to build capacity when you have got so many moving parts. Obviously, at some level even in India those decisions will be held back and then finally that will also translate into some level of uncertainty on the parts of consumers who may decide to hold back on big ticket decisions because they are also wondering how all of this is going to play out. So, the bigger concern is that you are once again looking at softer macros and softer global growth numbers in the near future.
So, what is next now? I mean, are we in for a prolonged period of perhaps protracted returns because the world will change, interest rate will change, dollar will change? Are we in for this bad patch of macro adjustments and which will keep everybody guessing?
Vetri Subramaniam: It is certainly a tricky scenario, very hard to figure out how it will play out. We were having this conversation three weeks ago, we would not have expected that the markets would bounce back as strongly as they did.
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But I always think it is useful to start with where you are in valuations when thinking about this. Largecap valuations in India after being rich actually came back into the fair value zone. In fact, at the low point in April, they actually went for the first time in a long number of months into what I would call the attractive zone. We are still in fair value. We are not really cheap in that sense, but certainly lot better value across the market cap spectrum than compared to where we were six or eight months ago.
So, I would just say proceed with caution, navigate carefully. This is the time to continue to manage risk. You would worry about where the earnings are and what we have been telling investors is one of the best ways to navigate this level of uncertainty is actually to look at the hybrid category of funds where you are getting a good carry on the fixed income part of the portfolio and you are not 100% invested in equity, so you are able to navigate the volatility much better.
So, I would say yes, we are in a little bit of maybe uncertain environment where best to allow that to reflect in your asset allocation.
I wanted to actually talk about this new
NFO
of yours, given the fact that you all have launched the
UTI Multicap Fund
at this point in time, I wanted to understand the rationale, what does it consist of, and what should one actually watch out for in this one?
Vetri Subramaniam:
Good question and I have been asked this many times that is this the right time, is this the wrong time and my only answer to that is there is no good time or wrong time to launch a fund strategy like the multicap fund. Look, this is a core diversified fund. The way we describe it that it uses a 3S strategy which means it sort of goes across styles of investment. It grows across the market in terms of investing across sectors and it cuts across the market in terms of investing across sizes of companies meaning mid, small, and large.
So, this kind of a portfolio strategy is appropriate for any investor who is really thinking about where do I want to invest for the next 5-year, 10-year, 20-year, 30-year journey that I am going to have as an investor.
This is not a strategy where you are thinking about okay I need to come in now, there is a sectoral opportunity, there is a thematic opportunity and then somewhere down the road I will have to take money out of it again. This is really the kind of strategy which sits at the core of your portfolio. So, my answer to that would be think of this as your core.
There is no right time or wrong time to invest in a strategy like this. The most important thing about time in this strategy is to think long term and therefore I would say think about it as long-term rather than right time or wrong time.
But given the runup that we have seen from those April lows and especially for the Indian markets, it is heartening to note the fact that the FIIs have made a comeback, but if somebody has to put in a fresh money in this particular month and take a medium to long-term time horizon, which space do you believe offers good opportunities because I remember your January take with us that the SMIDs valuations are looking expensive, the financials are looking good, but how do you see the allocation moving up from here on?
Vetri Subramaniam:
To put it in perspective, not much has changed in my opinion as far as the smids are concerned. I still find the midcap valuations extremely pricey, same for smallcaps. Obviously, I am talking about the top-down aggregates.
Once you peel it away, you may find some opportunities here and there which still look okay, particularly in light of the selloff we have seen in the last six months, but as a top-down asset allocator, midcap and smallcap is not where I would want to go. Lot more comfort in the largecap space and from a sectoral perspective, I will still hold on to the banking and financial services as the one sector where we think valuations are still supportive.
I am happy to see that it has done well over the last 6 months, 12 months, but over there, there is still an opportunity for this sector to do well because they have got pretty solid balance sheets when I look at it on an aggregate basis and one of the few ways in which the Indian economy will be able to push some fuel into the economy is that we have had credit growth at just about 11-12% last year, there is scope for that to accelerate closer to 13-14% which becomes more possible today because the
RBI
has started to intervene aggressively in terms of putting liquidity into the market and as the
MPC
has already cut rates and they have shifted to a policy stance of being accommodated. So, the macro situation along with valuations places BFS even today in a good scenario.
Do you see the comeback trade in IT? Do you see the comeback trade in government dominated businesses because that is where we have had a problem. I mean, last year government spending was low because of elections. This year IT companies have suffered because of what is happening in US on AI. Can those sectors come back?
Vetri Subramaniam:
As far as government is concerned, look the reality is that the government is still continuing to compress fiscal deficit even in FY26 not as dramatically as the last two years but they will compress it, which means government impetus to the economy is still limited and remember their fiscal trajectory for the next five years means that they will have to continue to bring fiscal deficit down.
So, I do not see government spending as a driver unless the government suddenly changes its mind and says no, we want to go in the opposite direction to support the economy. As far as it is concerned, the sector had a massive runup. It has literally been like this inverted V. It had this huge runup into the Trump election and coming to power saying that tax cuts will drive it spending by US businesses and then into this entire tariff related uncertainty, remember I used that word earlier, obviously, now there are concerns that companies may be hesitant to spend on new IT initiatives in the US or for that matter globally and that has caused these stocks to sell off. There is now better value starting to emerge in it.
When I look at their free cash flow yields, some of the largecap names are at 4-5% free cash flow yields. So, the valuations have become more real. I think incrementally that could be an area to look at. You made a point about AI, certainly their business models will face some challenges from AI.
But at the same time looking at the IT sector as I have for many years now, what we have seen is that every time there is a new wave in technology the companies that are able to pivot to provide services upstream of where the disruption is happening have actually managed to continue to navigate that well.
So, of course, we will have to see which companies are able to retrain, reallocate resources into upstream areas of implementation of AI, but some of them may actually get a tailwind but that may still be a one to two years away.
The other challenge for the market is what happens to IPOs? What happens to promoter stake sales? While April has been clean because there were no IPOs and promoters never wanted to sell at that price. Do you think that same flywheel will start again, IPOs will start, FPOs will start,
QIP
will start, NFOs will start which have started.
Vetri Subramaniam:
Well, interesting you put it that way. I think this is a natural market mechanism. I mean, when the market is very buoyant, the supply side responded be it through IPOs, QIPs,
OFS
, promoters selling down. The minute the secondary market became less buoyant, automatically the supply side of the equation started to pull back. So, there is a natural balancing that happens over here and without doubt you need to see a lot more excitement and maybe a little bit more stability in terms of policy before a very big window for IPOs and fresh supply of paper starts to open up again.
But I think that is a natural balancing equation. Keep in mind that eventually capital markets exist so that people with capital can provide it to the entrepreneurs who need capital. So, I never look at supply as something which is negative for stock prices. For a healthy capital market, for the economy to grow, capital mobilisation and investment is part of that and that is the way we as investors should think about it.