Expect MF redemption trend to reverse once market corrects: A Balasubramanian

We are in a bit of a tricky situation because there is a gap between reality and earnings outcome expectations, says the CEO, Aditya Birla Sun Life AMC.

Domestic investors have become Robinhood traders. Central banks have started buying gold and as of now, earnings are just about okay and markets are continuing to rise.
It is an outcome of what the central bank has done in the last four-five months. For quite some time, worldwide the central banks have been acting very aggressively to boost confidence by cutting rates and bringing in more liquidity, by providing greater support to every corporates in the world and thereby pushing down the interest rates to such a low level that it makes everyone look for alternatives.

That is the reason we are seeing rally in gold and bond markets. All of that has come on the back of the great work the central banks have done in the last four-five months by injecting liquidity in the system. But having said that, this problem is, not only in India, even the global market is seeing a similar kind of a scenario. The reason why we are seeing an increased level of traction towards the risky asset class, especially equity and gold, of course, is the hedge against the dollar and that is where the money has been moving up.

And lastly, of course, it is led by inflation. Except for India where we have seen a bit of a spike in inflation mainly because of food inflation going up, globally inflation remains very much under control and therefore leaving very little money to be made in the form of real interest rate being available. We are seeing a good amount of traction towards gold as well. This is a worldwide phenomenon.

We did some kind of analysis that post the 2008 crisis, it took about one-and-a-half years to provide the necessary support to revive the economic growth, whereas in the last four months, post Covid, the support that has come from central banks and the respective government is so sharp that whatever they could do in the one-and-a-half, two years in pre-Covid times, they have done it in about four months. It takes some time for such a sharp support to reflect. The sharp bounce back in the market, was largely on the back of that. We are in a bit of a tricky situation because there is a gap between reality and earnings outcome expectations. Therefore, how that gets adjusted is something one has to just watch out.

Last two-three months have been tough for the mutual fund industry, especially on the equity side. Are things finally looking up in August or is August also shaky?
The way I see the trend, in 2019, we saw declining numbers that continued in April, May, June. We probably went into the negative bit for industry. I think the rate of redemptions for the month of August has come down.

Probably July was the worst in terms of being negative for the industry and equity. I would assume that the way August has begun, the downtrend would continue. At the same time, even investors are a little perplexed because the equity market is showing some kind of bullishness and at the same time, returns take some time to come back.

Whatever the people have been redeeming, they have been wondering if they are taking the right call. That kind of assumption is coming in the mind of investors and distributors as well. We have also been projecting the outlook. Probably we will see the trend going down and turn positive as the market corrects.

Everyone who has been sitting on the sideline was not expecting such a sharp bounce back in the equity market. Everyone wants to invest in corrections and hopefully when the correction comes, we will probably see the reversal of flows into the mutual fund industry in India.

Would you change the weightage in the portfolio at all in terms of the kind of themes that you are looking at or the ones that are likely to be more pronounced going forward?
Yes some of these areas where we have been quite successful in building our post-Covid portfolio when the fall came, had a link to the economic downturn. Also the growth is not going to come back in a hurry. Why would you then hide yourself in such a scenario in portfolio allocations? We have been quite successful again building the portfolio towards sectors that we can call a little bit agnostic to the current downtrend pandemic related issues. At the same time, it could be beneficiaries such as the pharma, IT and energy sector and that is why we went a little overweight at the cost of bringing down the exposure to the financial services sector to some extent.

We are also seeing some kind of revival of sectors especially on rural related demand that could come back on the back of good monsoon and also sectors such as commodities. These are cyclical sectors but having seen a significant fall or having seen destruction of value in commodities in the last four-five months, this demand supply equilibrium is coming at par now. We will start seeing an uptick in price movements and that is also something which as a fund house, we have done in terms of allocation to metals and commodities as a sector.These factors are helping us in portfolio transactions.

But having said that, there is a gap the market uptick and buoyancy vis-à-vis the buoyancy on economic growth there is a gap at the same time there is a gap between the reality versus earnings outcome expectations. One has to live with that given the fact that right balancing between the growth versus value and liquidity versus where the interest rates are prevailing and so on so forth.

In terms of the risk factor, do you feel that a lot of the optimism is priced in?
Having seen a significant uptick in the market, naturally it has to get the sufficient support from the earnings as well, that is one. In the last four-five years, India has been struggling to pass on the transmission of interest rates reduction. The government has done a great job in this area providing comfort to banks for extending loans to the MSMEs and SMEs by way of guarantee and probably the banking industry will show an uptick and credit growth only because of the government support that has come for the SME sectors.

That in my view has helped in bringing down the interest rates and even the home loan rates have now dropped close to about 7-7.25% for the middle class borrowers which also means there has been a significant success which the Reserve Bank of India has created in transmission of rates in reality. This in my view will take some time and that is one of the reasons why there is a hope that consumer demand could come back especially on the borrowing side as interest rates are so low and equities are so high.

At the end of the day, the carry game will come and hit the banking industry more. Keeping the money with the Reserve Bank of India window could help your interest margin and therefore help retain the profit. Therefore, banking sector plays have to come back on the earning side and that is something the government is pushing very aggressively, initially by way of guarantee. But as time progresses and things get better, the credit market will start building up.

My view is RBI has achieved greater purpose of bringing the interest rates along with Government of India the form of a guarantee schemes which gives a lot of scope and hope for the revival of consumer demand, may be not in the next one or two months, but a sustained low interest rate regime will force the lenders to go to the market looking for borrowers and that is the time we will see improved confidence.