After the election verdict, the broader markets have significantly outperformed benchmark indices, defying the expectations of many fund managers. Harish Krishnan, co-chief investment officer (CIO) and head of equity at Aditya Birla Sun Life AMC, tells Vivek Kumar M that he does not expect this runaway growth to sustain, given there is no divergent trend when it comes to earnings growth. Excerpts:
The outcome of the Lok Sabha elections was not as per expectations, but the market has recovered from the shock. Do you see things changing in a big way for the markets?
We do not expect a big departure from the previous policies. The market is also gravitating towards that view itself. There will be reasonable continuity both on the fiscal glide path as well as the borrowing programme. But we do expect higher focus on consumption compared with the previous regime, because earlier, the supply-side reforms were a major priority.
We currently have 5-10% changes in our portfolio compared with the pre-election. It is not a meaningful change in our stance. But over the last six months, we have moved into largecaps and midcaps, and trimmed our position in smallcaps.
We are back to record-high levels. Do the valuations concern you, especially in the broader market?
The valuations are above fair value in most segments right now. The value proposition opportunities are mostly available only in large caps.
The runaway growth in the broader market cannot sustain. We are not seeing sharp divergence in earnings growth between the broader market companies and large caps. Therefore, the dispersion in returns should moderate in the next few years.
While it is difficult to predict the near-term view for the market as it will be a function of liquidity, sentiments and earnings, we are positive from a two-three year perspective.
You have come out with a new quant fund. How is this different from your other fund offerings and how has the investor’s response been so far?
It is the first such offering from our fund house. We will start by narrowing the universe of stocks such that they fall in the large and midcap category. Both investors and distributors have been appreciative of the fact that this is a different fund from others.
Model based investing not only provides greater flexibility & repeatability but also maintains discipline by pre-defining the entry and exit points. We expect this to be one of our largest NFOs till date.
What is your view on the banking space and consumption stocks? Both have been underperformers in a way over the last few years.
We find larger banks more attractive from a long-term perspective. But smaller PSU banks may have an advantage in the near-term because liquidity is tight and the loan-to-deposit ratio (LDR) is lower for them.
For consumption stocks, we don’t see much room for re-rating. We need to see some evidence or meaningful change in posture from the government in terms of wanting to boost demand creation. But one has to look at valuations from a different perspective here because these companies have higher cash flows and capex requirement is very low.