The year is drawing to a close and the stock market is at the crossroads. On one side uncertainties are looming, but on the other unbridled optimism is driving investors' confidence. ETMutualFunds spoke to Rahul Singh, CIO - Equities, Tata Mutual Fund, to make sense of what is happening in the market. "When we enter a year it is always interesting and challenging. I have not seen any year where we are entering in January and we say that markets will give 20-25%. Every year we enter with the same emotion," says Singh, who was in Delhi recently. "What we have to do is to see what makes sense, how do we change our portfolio, how do we remain sensible in that scenario," he adds. Edited interview.
The year is drawing to a close. Mutual fund houses and investors had a great year in 2023. Looking back, what are your impressions?
A lot of things happened in 2023. Firstly, because of the geo-political situation as well as the balance sheet strength of the corporate sector and the banking sector, there was initial revival in the investment side. Look at the corporate sector you are seeing more investments happening. Of course, no comparison to what happened in 2006 and 2008, which was a mega capex cycle, but there is still a revival. The second thing is that you were seeing the fact that the interest rate, everyone's expectation that it will start coming down by the end of the year, it is obviously not happening. Markets become broader, essentially because the FII selling continue given that the interest rate are high. At the same time the different parts of the economy started doing well. This is why the mid and small cap started doing well. This year will be always remembered for the very broad base market but driven by the fundamentals also. Not that it was just euphoria or anything. We are still not at the stage where we can call it a bubble or a euphoria but it is a reflection of how the economy shaped up this year.
The year started on a cautious mode. However, the stock market surprised and rewarded investors handsomely in 2023. As we are stepping into the new year, the mood is again cautious. How do you see the situation?
When we enter a year it is always interesting and challenging. I have not seen any year where we are entering in January and we say that markets will give 20-25%. Every year we enter with the same emotion. And last year if we look in January, the emotions were very similar - the interest rates are going up, what will happen and equities will come down, the world will go into a recession. So every year there are different concerns which we have to tackle. So next year the concern is elections and when do the interest rate starts coming down and the fact that the valuations have gone up. So there are a combination of concerns every year.
What we have to do is to see what makes sense, how do we change our portfolio, how do we remain sensible in that scenario because the good news is that the economy itself is doing well. So when the economy does well, there is a basic support for the markets. Now sometimes that support might lead to over valuation or slightly higher than fair valuation. We are I think slightly higher than fair valuations but we are not significantly overvalued for us to start worrying so much that I will say that you should come out of the equities. But I think the concern this time is about elections, geo-politics in terms of what happens to crude prices. Those are the kind of concerns we have to live with and manage within that concern. But as long as the banking sector is strong, the corporate sector is debt free and strong and as long as there is a genuine revival in some of the sectors which were not doing well earlier like real estate or investment cycle also. Then we will be more confident about finding opportunities to invest even in a challenging market..
Investors still need to confront tricky issues like higher inflation and interest rates globally, geopolitical worries, anemic economic growth among other things. What is your assessment?
The assessment is that you have to manage those risks. See I cannot have a view that the geopolitical situation will completely get solved. I can not predict whether in the elections the same government will come or not but if there is a significant expectation and if the markets go up much more than that before the election then I have to manage the risk and concern accordingly. So I have to play it as to how the situation is unfolding without trying to predict too much.
What was the year like for Tata Mutual Fund? The AUM grew 35% in this year, but very few Tata MF schemes were in the top 5 or 10. What is your assessment?
We look at not on a one-year basis. If you look on a three-year basis, a lot of our mutual funds are performing. If every year you look at yearly basis, things keep moving up and down. However, if you look at some of our most steady funds like balanced advantage, large & mid cap, small cap, banking, equity PE fund, we have a very good set of funds which are doing very well on a three and five year horizon. In one year things keep changing but if you are taking a one-year perspective also, the funds that are doing very well are mid cap, banking and business cycle funds. These three funds are doing extremely well. They are pretty high in the rankings but the idea for us is to trust the process and make sure that we deliver on a three and five year basis and not really always try to be number one or number two in every year. It's not possible, even the best of the fund managers are not able to do that and my own sense is that as long as we stay true to that process, we will do well on a three and five year basis.
Many stock market pundits are expecting the large cap funds to offer superior returns in 2024 as mid and small cap funds have gained a lot in the current year. Do you subscribe to the view?
In the short term, I think large caps have slightly better risk reward. But it is not that I am negative on mid and small caps because I am also finding more opportunities in small caps. So from a growth perspective, even though small and mid caps have done well and then might take a breather for the next six to nine months. It is not something that I am negative about but this time the rally in small and mid cap is also driven not just by the flow but also by fundamental improvement in some of the sectors which were not doing well. Liquidity also has to play a role but depends how much is liquidity playing a role and how much is fundamentals playing. If you see only liquidity driving the valuation, you need to worry. If the fundamentals are also supporting, you have less reasons to worry. But in the short term large caps are offering slightly better returns.
What is your advice to existing and new investors? How do you think they should proceed in the new year?
Whether it is existing or new investors, I think the asset allocation will be important for next year because global risks and other risks as we mentioned are there. The valuations are not very cheap. You have very less comfort or less cushion if anything goes wrong. My approach has been 40:40:20. That is, 40% in hybrid categories such as balanced advantage fund, multi asset funds, 40% in the diversified equity category and the last 20% should be for generating alpha from funds like thematic funds whether it is small cap or business cycle or a banking or infra fund. So this is the market to basically manage your risk and not to run away from equities. And while you manage your risk ,you should also realise that there is alpha to be made because of the way India is positioned. This is 40:40:20 allocation tries and balances both the objectives.
