Interviews

Mr. Rahul Pal

Chief Investment Officer at Mahindra Manulife – Fixed Income

Mr. Rahul Pal is a Chartered Accountant. Prior to joining Mahindra Manulife Investment Management Private Limited, he was associated with Taurus Asset Management Company Limited as ‘CIO – Fixed Income’. He has also worked with Sundaram Asset Management Company Limited as ‘Fund Manager – Fixed Income’. In these roles, he was responsible for managing and overseeing the FixedzIncome Portfolios.

Q1. What are your views on the US Fed rate and how will it impact the debt markets?

Ans: Globally interest rates have looked at askance at the US interest rates. The narrative continues to be in a flux with uncertainty surrounding the inflation trajectory. However despite the low unemployment numbers and a stronger GDP, data on credit card and auto loan delinquencies present an interesting dichotomy .We also believe, with China and European economy may possibly show a sluggish growth, thereby creating a lower inflation trajectory globally.

Q2. What trends will drive the debt mutual fund industry in FY25?

Ans: The major trends for the debt mutual fund industry would be the movements of the interest rates in India and Globally. If inflation cools down and interest begin to come off peak levels, we may see growing interest in the debt mutual fund space as corporates look to raise capital to build capacity for growth. The loosening of relatively tight liquidity policies may also be a key factor.

Q3. While the interim budget was announced on 1st Feb 2024, the final budget is yet to be released. Do you think there are any concerns in the debt market that require government intervention?

Ans: No specific concerns to be addressed. A review of recent changes to tax policy in relation to indexation benefit could be helpful.

Q4. Debt mutual funds have been witnessing MoM outflows and in December it reached over 75,000 crore. On the other hand, equity mutual funds have been gaining popularity among investors. Do you believe that in the war between equity and debt, the latter will prevail?

Ans: The main reason for major outflows have been a combination of strong equity performance and change in tax laws that have resulted in the stronger attractiveness of certain hybrid funds. However, the utility of safety, compounded growth and liquidity remain advantages of investing in debt mutual funds, which will not be eroded by these trends.

Q5. Why should an investor consider investing in a debt mutual fund and not in fixed deposits where there is a momentum going on of higher interest rates?

Ans: The key advantage of Debt mutual funds is the compounding effect of capital appreciation. In FD, the interest payments are taxed (including TDS) immediately. With fixed income the investor pay taxes on capital gains only at the time of redemption, allowing a greater chance to grow their investments, while getting the similar advantages of FDs such as liquidity and investment in relatively safer instruments.

Q6. Which category of debt mutual funds would you recommend an investor to consider in the short term and medium term?

Ans: For the short term, depending on the investor’s investment horizon, we would recommend a fund from the range of Overnight Funds to Short Duration Funds (investment horizon of 1 day to ~2.5 years according to need.). For longer investment horizons, we would recommend Dynamic Bond Funds, as they are able to actively manage duration and change their positioning in accordance with market movements.

Mr. Krishna Sanghavi

Chief Investment Officer at Mahindra Manulife – Equity

Mr. Krishna Sanghavi is a CMA from Institute of Cost and Works Accountants of India and has also done MMS in Finance. Mr. Krishna Sanghavi has over 27 years of work experience of which around 14 years have been in the Mutual Fund Industry and around 8 years in Life Insurance Industry. He was also associated with Canara Robeco Asset Management Company Limited, Kotak Mahindra Asset Management Company Limited and Aviva Life Insurance Company India Ltd. as ‘Head of Equities’. In these roles, he was responsible for managing and overseeing the Equity Portfolios.

Q1. We have entered the last month of the current financial year. What is your outlook for the markets in near term say FY 24-25?

We need to evaluate markets in twin context of global sentiments and domestic fundamentals. Globally the sentiments are strong towards risk assets (including equities) driven by expectations of monetary policy easing by US Fed and other large central banks. Any change therein can impact global markets on sentiments front and India too will have its own share of impact.

When looking at domestic fundamentals, we expect economy to be driven by a reasonably supportive policy framework post elections, aggressive capex cycle across manufacturing, core economic sectors (Power, Metal, Refinery etc) as well as infrastructure, strong balance sheet of banks to support lending. PSU divestments too can be a theme likely over next 12-18 months. From equity market angle, good economy is likely to be reflected by way of buoyant markets supported by flows from domestic s well global investors.

Q2. India right now is at a very bright spot when compared to other economies. Where do you think the market is in terms of valuation? Is valuation a red flag in some areas for you?

Being in a Bright spot typically means the valuations too are bright, with some degree of variation. Yes, Indian markets are reflecting the healthy economic fundamentals where Indian economy is likely to double in next 6-7 years in nominal terms, gaining rank from 5^th largest to 3^rd largest economy in world. From absolute context, large caps are in line with average valuations over past 5-7 years while mid and small caps are trading at some premium. And we have seen this in past where valuation gaps are created between large mid n small caps where each of these takes lead and cedes lead for a brief period but over medium to long term, all grow together. Valuation being a red flag in some areas is a true phenomenon at any point of time market, just that the pocket of over valuation keeps on changing.

Q3. What are the key challenges you foresee for the markets in FY25?

From investor perspective two big risks in markets are “high expectations post a very good FY24” and “increasingly leveraged route to participate in markets”. From economy angle, markets need global economy to pick up and support export led growth while valuations necessitate easy monetary policy stance by US Fed and other large central banks.

Q4. Sticking with the ‘Amrit kaal’ theme, can the financial market economy outperform the actual economy? What are your thoughts?

When we look at past 15-20 years, Indian financial markets have managed to outperform the growth in nominal economy. We expect this trend to continue in this Amrit Kaal theme.

Q5. What are your thoughts on SEBI's move to restrict flows into midcap and smallcap markets? The regulator has called that space slightly frothy. What's your take?

In our view, there will be at times pockets within all market caps which are overvalued or have higher liquidity risk. Having better disclosures is always good for investors, and we think that these recent steps are in that direction. What is much more important at these times is to ensure you are not influenced by recent past performance, have a long-term frame in mind while investing, and stick with diversified funds.

Q6. Which sectors or themes have you been reading and researching about or what are the latest additions to your funds?

We have been working on understanding the likely implications of Amrit Kaal in terms of growth potential across sector. As a macro theme, as India embarks on import substitution &/or export, Indian factors of production (land, labor, capital, resources like metals n power n fuels) will end up replacing the same factors of production in other countries. India will need to create capacities to meet the need for higher usage of these factors, including skilling of workforce, setting power plants, metal plants, refineries etc.

Simultaneously, as growth in capex gets spread to growth in income for workforce, consumption will also increase over this period. We have been adding companies that fit these themes.

Mr. Harish Krishnan

CO CIO and head - Equity Aditya Birla Sun Life AMC Limited

Mr. Harish Krishnan has as an experience of nearly 20 years in the Asset Management industry, both domestically and internationally.

Prior to joining Aditya Birla Sun Life AMC Limited (“ABSLAMC”) as the Co-CIO and Head Equity, he was associated with Kotak Mutual Fund for more than 10 years as Senior Fund Manager - Equity. He has also worked at Kotak Mahindra (UK) Limited where he managed offshore funds based out of Singapore and Dubai.

He holds a Bachelor’s Degree in Engineering from the Government College, Trichur and has done his PGDBM from IIM Kozhikode. He is also a Chartered Financial Analyst from CFA Institute, USA.

Q1. The small & midcaps took off in 2023 - will the flight land in 2024 or will it gain altitude in the new year?

Ans: We expect a year of consolidation in broader markets. Last year, almost 50% of Top 500 stocks had an alpha of 10% compared to NSE500TR. Risk taking was very well rewarded, we think after such a strong year, gains to moderate across the breadth of market. Over longer term, we remain positive on mid and smallcaps, but excessive returns of small over large will likely fade, as economy and earnings normalise after strong upturn in last few years (post Covid)

Q2. PSU remained in the spotlight in 2023. Will the party continue in 2024?

Ans: Certain pockets of PSU like defence/railways have outsized gains in last 3 years. Valuation of certain indices like NSE Defence index is close to 10x price to book trailing, higher than even consumption index. In the face of such extreme valuations, we expect such pockets to face challenges (exact timing is hard). PSU in utilities, select financial appear more reasonable despite the run up. Sentiment has turned extremely faviurable, and with run up in elections and expectations of stable government, there may be continued momentum in this space in near-term.

Q3. The year gone by was a landmark year for IPOs. What is the kind of fundraising you foresee in 2024?

Ans: 2023 has been a good year, with abundant liquidity and favourable sentiment. While liquidity expectations continue to remain strong, it is hard to gauge sentiment in a year where there are multiple global elections (including in India). We would expect sustained fund raising till sentiment remains buoyant for India.

Q4. After listening to the budget speech, would you recommend any changes in the portfolio or just stick with what you have?

Ans: The Vote of Account budget continues to focus on maintaining its path of fiscal prudence and thus, there are no changes in our portfolio construct.

Q5. As a fund manager, which themes you are betting on and believe will do well in 2024 considering the upcoming elections?

Ans: We think investment theme will continue to gain traction, consumption continues to be on slow lane. Given elections, there was expectations that there will be greater sops to consumption segment, which the government has not pursued (in vote on account budget). Similarly, focus on sectors like gas pipelines, renewable push, digital infrastructure rollout, exports focus continues to be areas of thrust of current government, which can see renewed thrust post elections. We are playing this through our exposure in capital goods, auto, select financials, pharma, manufacturing companies.

Q6. As the market reaches record high, many investors become hesitant before putting in money. What would you advise them?

Ans: Time in the market is more important than timing the market. Last year, while index like NSE500 gave close to 25% returns, if one had missed out the best 10 trading days, returns would have come down to 11%.

Equities are an avenue for long term goals, Indian equities are well poised given competent management teams, multiple reforms, productivity gains and good balance sheets of corporate India. However, valuation in near term are above long term valuations, we would advise investors therefore to invest with long term view. Within this construct, rather than fret over markets at highs, we would advise investors to use asset allocation framework. Products like Multi-asset allocation funds provide a solution for investor asset allocation needs.

Mr. Kaustubh Gupta

Co-Head - Fixed Income Aditya Birla Sun Life AMC Limited

Mr. Kaustubh Gupta is the Co-Head of Fixed Income at Aditya Birla Sun Life AMC Limited (ABSLAMC). Kaustubh brings with him 17 years of extensive investment experience having worked in various capacity of treasury finance, liquidity management and fund management. As Co-Head, Kaustubh leads the overall fixed income portfolio management.

Prior to joining ABSLAMC in 2009, Kaustubh worked with ICICI Bank for 5 year in the Asset Liability Management team.

Kaustubh is a Chartered Account and CFA (Level 2) by qualification.

Q1. How does 2024 look up for the Indian debt market? What are the key factors that will drive inflows?

Ans: The entire yield curve between 1-3 year is available at 7.75% - 8.0%. Given our macro views, these rates are unlikely to inch up much higher. Nominal yield curve is elevated and, on a risk reward basis fixed income looks like an investible asset class beyond the asset allocation principle. Further this year India G-sec market will get large allocation in JP Morgan global bond indices which could pull benchmark yields lower. Thus for 2024, we think time for dialling in active duration risk through short-term funds (Short term fund, corporate bond fund, and Banking & PSU fund) is apt now.

Q2. How would you rate the interim budget on a scale of 1-10 and why?

Ans: This year budget can be simplified as “ Bond budget”. Not only government has stick to path of fiscal consolidation, they have surprized market, but much lesser borrowing number compared to consensus. We think this year’s interim budget is non inflation and primary targeted to achieve macro stability in uncertain global macro backdrop for global economy. Thus, we would rate budget 9/10.

Q3. In the Interim Budget 2024, the government has given a lower-than-expected fiscal deficit target of 5.1% of GDP for FY25 and even lower 4.5% by 2025-26. How do you interpret this?

Ans: We would read this budget numbers to conservative, credible and focused upon prioritising macro stability over short term push to support growth.

Q4. For five consecutive policy reviews in 2023, the RBI chose to hold rates, citing inflation threat. Is there any possibility of interest rate softening in 2024?

Ans: We expect headline rates to remain status quo for most part of 2024 with possibility of a shallow rate easing cycle at the end of 2024 unless growth slows down to sub 6%. As global central bankers ease rates, RBI will respond to this with liquidity infusion measures and regulatory relaxations but most of them will be back ended.

Q5. Can you discuss your approach to select debt securities in the current market, emphasizing liquidity and credit quality?

Ans: Debt markets face three types of exposure: credit, liquidity, and interest rate risk. Although it is important to look at these in isolation to identify individual risk, but as active debt manager we also use interplay of all of them on the overall investment strategy of funds. Assessment of various probable economic scenarios impacts the kind of asset mix portfolio construction will be guided through. In current scenario, we think liquidity play and duration play is going to give most of fixed income returns to investors. Accordingly, we are overweight G Sec across our portfolio and running higher duration. Over course of next 3-6 months, if our view plays out we will switch to AAA corporate bonds to benefit from liquidity opportunity as well. We continue to remain underweight credit spreads because it is priced richly.

Q6. In the wake of budget 2024, what kind of investment strategy do you suggest for bond investors?

Ans: Time is ripe for adding duration to fixed income portfolios. With in that actively managed duration funds will do well to play duration on liquidity infusion play. We are also coming out with Index fund opportunities themed around Bond indices inclusion at minimal expense which will invest only in FAR securities. These will be managed passively and could turn out to be the good risk adjusted capital gains opportunity. Short-term investors should look to invest in money market, ultra-short-term funds & low duration funds over liquid funds.