ETMarkets PMS Talk: Karan Aggarwal on India's 10-year wealth themes - Banks, infra & financial inclusion to lead

Time of India

06-05-2025

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In this episode of ETMarkets PMS Talk, we speak with Karan Aggarwal , Co-Founder and CIO at Elever, a quant-based PMS, who shares his insights on India's evolving investment landscape and the factors shaping long-term wealth creation.As India navigates global volatility and prepares for its next growth cycle, Aggarwal identifies banks , infrastructure, and financial inclusion as the key pillars that will drive the country's wealth story over the next decade.From the tactical success of the Elever FactorShields Fund, which delivered 20% returns in FY25, to sharp views on the US-led macro shifts and sector rotation strategies, Aggarwal outlines how investors can align portfolios for stability and long-term alpha. Edited Excerpts –A) EleverShields has delivered around 20% in total returns over FY 2025 while benchmark has delivered around 11% during the same period.We are in market correction since Sep 2024 and EleverShields has delivered losses of around 7% during same period vis-à-vis losses of around 11% for the benchmark. Strategy outperformed benchmark in 7 out of 12 months.Maximum underperformance of around 2% came in month of EP 2024, a month marked with extreme bullish movement.A) 20% returns translate to gains of INR 10 Lakhs on investment of INR 50 Lakhs. In this hypothetical scenario, investor would have sitting at corpus of INR 60 Lakhs.A) Elever FactorShields provides tactical exposure to relatively low-risk factors such as low volatility, dividend, quality, and value, with 100% allocation restricted to the top 200 companies listed on the NSE (midcap and large-cap space).Portfolio building involves a two-step process. In the first step, individual factor portfolios are constructed around multiple factors with the goal of alpha maximization. Each of these factor portfolios is designed to outperform the broader markets over a holding period of 10-15 years.However, there is significant divergence in the alpha behaviour of different factors. For example, alpha expansion for the low volatility and dividend factors is typically maximized during bearish market conditions, while alpha for the momentum factor is maximized during bullish market conditions.On the other hand, factors like quality provide consistent but relatively lower alpha across market conditions. Essentially, each factor has its own risk profile and alpha cycle.The strategy improves risk-adjusted returns by rotating across alpha-maximizing factors in line with market cycles.Through a tactical rotation model, a market call is made, and based on that call, suitable factor portfolios are selected to build the final portfolio. In a nutshell, the strategy is a "fund of factor portfolios."In FactorShields, exposure is restricted to low-risk factors like low volatility and dividend during bearish phases. During market consolidation or bullish phases, the allocation is increased to moderate-risk factors such as quality and value.The strategy is designed to deliver low-risk alpha to investors with a moderate risk profile, without exposure to high-risk factors or stocks outside the top 200 stocks on the NSE.A) We are looking at the end of the nearly half-century status quo where the US was printing currency and buying goods and services from other countries while beneficiary countries were providing a part of earnings back to the US government in the form of debt.With debt nearly quadrupling since 2008 GFC and interest payments at around US$ 1.5 Trillion, this economic model is way past its expiry date.The US is expected to opt for 'voluntary recession' in the next 12 months to navigate the biggest debt restructuring exercise in human history and it would create multiple 'volatility ripple' events (we have already seen tariff tantrums) throughout FY 26.It can have multiple-degree impacts on the Indian economy as the IT sector is one of the largest sources of white-collar employment with secondary negative impacts on real estate sectors of dollar cities such as Gurgaon/Bangalore and urban consumption.Having said that, relative underperformance of India vis-à-vis global peers in last 6 months of FY 25 has placed it favourably on technical charts in FY 26 and we expect Nifty 50 respect bottom of 21,300-21,800 during global volatility events with sustainable recovery expected from June-July onwards on the back of USD depreciation, low inflation and FII rotation away from US.We have seen some proactive steps from the government/RBI to counter global headwinds with budget tax incentives, RBI rate cuts/liquidity boosters and a potential Indo-US trade deal.Though, we expect the Nifty 50 to make a new high by Diwali 2025, the trajectory of markets would be largely decided by the effectiveness of aforementioned initiatives in neutralizing adverse impact of global disturbances.A) In the medium-term, consumer staples and power utilities look good as they are driven by domestic demand and largely protected against demand fluctuations.With rural consumption in India growing at nearly 2x vis-à-vis urban consumption, sectors linked to rural themes such as seeds and fertilizers also seem to be a decent bet for the next few years.If one is looking beyond the next 2 years, Banks and NBFCs stand out as the bank credit to GDP ratio for India is one of the lowest among G20 economies.As India is expected to become a middle-income country in the next 15 years, financial inclusion would catch up with other EM peers and these sectors would be natural beneficiaries. Infra is another 10-year story as India looks to cover the infrastructure gap with China over next decade. However, valuations are quite frothy in many sectors despite recent corrections.A) We have been expecting a US volatility spike in April 2025 for the last 6 months. Our models were already showing a partial cash call since Sep 2024 and the March rally gave us an opportunity to lighten the portfolio gradually with nearly 60% cash positions by March-end.Strategy captured global volatility spikes and triggered risk rotation in 1st week of April and we gradually shifted positions to low-risk factors while deploying the cash strategically to leverage the dips. We still have sufficient cash on books to leverage expected dips in first 15 days of May 2025.A) Typically, all investments follow a standard rule in the long-term – 'High Risk High return, Low Risk Low Return'.For example, savings return 4% as it is zero-risk while FD give 6%-8% as it comes with liquidity risk, Similarly, AAA-rated government bonds provide returns of 8%-9% while low-credit bonds provide returns of 12%-13% as there is default risk with low-credit bonds.Academically, low-volatility stocks are supposed to underperform broad benchmarks to account for lower risk associated with them.However, studies across global markets reveal that in the real world, low volatility stocks tend to outperform broad benchmarks as positive alpha during bear markets is large enough to compensate for negative alpha during bullish phase. This anomaly is globally known as 'low volatility anomaly'.FactorShields improvise on low-volatility anomaly by striving to maximize positive alpha during bear market while maintaining zero or slightly positive alpha during bullish phase, thus enhancing low-risk alpha for investors.A) Factorshields starts with top 200 companies listed on NSE. These stocks have to pass an inversibility filter which sets criteria around market cap, liquidity and free float.Using pre-defined factor scoring rules, filtered companies are ranked on various factors such as quality, value, volatility, dividend, alpha, momentum.Based on pre-set security selection and weighing rules around factor scores, factor portfolios are built. Some of the portfolios are a combination of two or more factors and sector/size constraints would also be part of the security selection process.Each of these portfolios are managed independently and follow different review schedules.As the next step, based on output from our proprietary tactical model, a decision is made on which factor portfolios have to be selected and how much weight has to be allocated to each of the selected portfolios which leads to creation of the 'Fund of factor portfolios'.In Factorshields, factor portfolios covering low volatility, dividend, quality and value are considered for selection.A) If we look at back tested data, during 2008 GFC, Nifty 50 went down by around 63% from its 2007 peak while EleverShields cut the losses to 32%.Coming to live data since Oct 2024, while benchmark has lost 9%-10% till Mar 2025, EleverShields restricted the losses to 4%-5%. We would not say that risk is completely eliminated but based on data, it can conclude that risk has been less than standard equity products in the market.Risk management in EleverShields comes in multiple layers. First of all, lower systematic risk with exposure restricted to low-to-moderate risk factors.Unsystematic risk is also quite limited with exposure limited to top 200 companies on NSE. At model level, tactical models provide insights on factor selection to optimize risk allocation in line with market conditions.Additionally, there are two approaches to manage equity risk. Tactical model provides cash calls which indicate reduction of equity exposure during high volatility periods or periods prone to equity correction.Also, strategically, long positions in index put options are also taken to explicitly hedge market risk.(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)