Interviews

Mr. Sanjay Chawla
Chief Investment Officer (CIO) - Equities, Baroda BNP Paribas

Mr. Chawla has over 33 years of experience in fund management, equity research, and management consultancy. He was designated as Chief Investment Officer with Baroda Asset Management India Limited. In his previous assignment, he has worked with Birla SunLife AMC as Sr. Fund Manager-Equity, managing various schemes with different strategies. Mr. Chawla has also worked as Head of Research with SBI Capital Markets and in various capacities in the equity research space in Motilal Oswal Securities, IDBI Capital Markets, SMIFS Securities, IIT Invest Trust, and Lloyds Securities.

Q1. The market has shown nearly continuous upward momentum after the June 4 crash. What factors are driving this optimism?

In our view, two things have contributed to the momentum in markets after the post-election crash. First was the realization that the coalition is strong with the major party accounting for over 75% of the seats. This was reinforced by the fact that the ruling party did not have to part with any major portfolios during the government formation. The second factor has been the flow into equities. Not only have the retail inflows maintained their momentum, even the FII flows have turned marginally positive post elections. This could be a result of the anticipation of rate cuts by the western central banks with the ECB already taking 1 cut and the likelihood of a Fed rate cut by Q4 of 2024 rising.

Q2. We have reached the halfway mark of 2024 – what are the prospects for the second half of the year? What are the important trigger points that investors should keep a close watch on?

Near term (the balance of 2024) we expect markets to track earnings. We are currently in the 1Q earnings season and with markets expected to deliver 14-15% growth we would expect markets to be broadly in that ballpark. We think investors should keep a close watch on the following factors:

1. The Union Budget scheduled for next week. This will be the first Budget for NDA 3.0 and as a result it becomes a kind of policy document to identify the focus areas for the government in this innings. The other would be any kind of tinkering on equity taxation which could involve redefining the tenure for long term, the rate for long term or the definition of “equity” to see whether it will continue to encompass arbitrage funds as a product.

1. The US presidential polls: Globally we have an important event towards the year end by way of elections in the US. Typically, the focus areas of Republicans and Democrats has tended to be different and any switch in government could result in different priorities.

2. China: Stimulus - The Chinese economy appears to be slowing faster than expected. With the government there contemplating an investment package, we will need to keep a close watch on crude/commodity markets. Relatedly China activities relating to Taiwan would be the other area to watch out for.

3. Any incremental regulations relating to F&O: The market regulator has been voicing concerns over the rising share of retail exposures in the F&O segments. Any tightening of regulations on this segment either by way of higher ticket/lot size, higher margins or pruning the F&O list could cause some hiccups.

Q3. Given the multitude of stocks trading at all-time highs, how challenging is it to identify stocks with reasonable valuations? Additionally, do you see a risk to the bullish trend due to the over-exuberance observed in SME stocks, many of which double in value on their listing day?

It is always interesting to talk about stocks hitting all-time highs as it brings about a mixed feeling of rejoice and fear. The former because of the returns on investment and the latter for the possibility of a bubble. We, however, always like to look from the lens of fundamentals. Consequently, we are not surprised or un-nerved with markets and stocks hitting all time as it comes in tandem with the underlying economy and corporate earnings doing the same.

While there are pockets where the up move has got exaggerated and stock prices may have run ahead of fundamentals, this can’t be said on a market wide basis. When we look at the investment canvas, we are still able to identify opportunities which look exciting to us and are available at valuations which are reasonable. Our message to investors is that “Do not be afraid of market making new highs as returns would get generated only when markets hit new high”.

As far as the SME stocks are a concern, these are typically out of our purview of investment consideration set. Having said that it is true that this segment has seen a lot of activity in the last couple of years. Investors should realise that this is a high-risk segment as most of the companies are in the fledgeling stage and mortality rates of companies at this stage can be very high. Nevertheless, this space will also see some of the companies emerge as future champions. Overall, we believe that this space is still evolving, and investors would also mature over time making it far more interesting space than it is presently.

Q4. While we maintain a positive outlook on India in the long term, what factors could potentially disrupt this bull market over the next year?

The Indian Economy has demonstrated resilience and maintained healthy macroeconomic fundamental despite global uncertainties. Macroeconomic stability, Robust domestic demand and Increasing per capita GDP indicates positive long-term outlook for Indian markets. However, in the near term there may be some disruption driven global as well as domestic factors. Any rise in commodity prices due to ongoing geopolitical tensions and delay in rate cuts by Fed could disrupt the bull market. On the domestic side, any kind of political instability arising from upcoming state elections can also impact the sentiments. Spatial dispersion on rainfall is key to ensure inflation in under check.

Q5. How are earnings likely to pan out in the next 6 months? A recent trend suggests that prices have run up ahead of earnings upgrades.

We are amid first quarter earnings seasons. Expectations are for Nifty earnings to increase by low single digits in 1Q. Sectors such as Automobiles, healthcare, financials, telecom and capital goods likely to contribute to growth, while Oil & Gas, cement, chemicals are likely to drag earnings growth. Over the next six months we do expect earnings growth to improve led by contributions from consumer staples and IT sector. India is one of the fastest growing economies and continued political stability is leading to positive investor sentiments. While markets have rallied, it largely reflects the earnings potential of companies as seen over the last four years, wherein Index appreciation is largely in line with earnings growth

Q6. What is your interpretation of the continued surge in PSU stocks following the elections? For investors considering a 5-year horizon, is it advisable to consider investing in PSU funds?

The government has been on a drive to improve efficiency of PSU and boost corporate governance practices. Post the elections a stable government with continuity in policy framework, has given confidence on PSU execution. The government’s emphasis on localization, increased capex, and ‘Make-in-India’ has improved revenue and earnings visibility for many PSU companies. The continued focus on PSU has yielded results and reflects in higher valuation multiples to many PSUs now compared to few years earlier. Also, PSUs have seen improved efficiencies and competitiveness leading to higher value creation. Market continues to expect that PSUs will continue to deliver on improved profitability, increased dividend flows leading to value creation in PSUs.

Mr. Prashant Pimple
Chief Investment Officer (CIO) - Fixed Income, Baroda BNP Paribas

Mr. Prashant Pimple has an overall experience of 24 years. He is esignated as Chief Investment Officer – Fixed Income of Baroda BNP Paribas Asset Management India Private Limited. His previous stint was with JM Financials AMC as CIO – Fixed Income. Prior to that, he has also worked with Nippon AMC, Reliance Mutual Fund. Mr. Prashant Pimple has done his B.Com, MMS (Finance), ACTM.
Academically, prashant is a Commerce Graduate from Sydenham College of Commerce and Economics and has completed his MBA from Jamnalal Bajaj Institute of Management Studies (JBIMS) and he has done ACTM, Chartered Treasury Manager course specializing in Treasury and Forex Management from The Institute of Chartered Financial Analyst of India.

Q1. Do you believe there's a chance that expectations for a rate cut could be delayed until calendar year 2025 due to the possibility that inflation might remain persistently higher than current estimates?

Headline inflation picked up above 5% in June-24 led by a sharp pickup in food prices. Whereas core inflation remained closer to historical lows. In Q2 FY25 inflation is expected to see a dip led by favourable base and post that inflation is expected to rise as support from base-effect wanes. RBI’s monetary policy focus is expected to remain on ensuring sustained moderation in inflation towards the 4%-target. Solely based on domestic inflation expectations the earliest RBI can cut interest rates is in Q4 FY25. By this period there will be greater clarity on food inflation risks and Fed policy.

Q2. What impact could the inclusion of Indian bonds in the JP Morgan Global Bond Index have on the money market and capital flows? How significant might this be for the interest rate landscape in India?

JP Morgan bond inclusion is expected to bring in approximately USD $20-$22 BN over next year or so in Indian G-secs. This inflow will certainly improve India’s forex inflows in addition to improving liquidity over a period. Positive flows will impact the interest rate sentiment and improvement in liquidity is expected to steepen the current flat yield curve thereby resulting in shorter end yields with downward bias. Both these factors are expected to have a positive impact on interest rate landscape in India.

Q3. Do you view the recent upward guidance from the RBI governor predicting 8% GDP growth for India as optimistic or realistic?

India’s growth story has been outlined with incorporation of structural shifts starting from adoption of GST regime, government’s thrust on capital expenditure, strong financial system driven by healthy corporate balance sheets. Impact of external headwinds on India’s growth has been limited as the government has taken proactive and balanced approach. One of the key highlights of India growth story is reflected in the robust services economy which has been supporting India GDP growth. Weak rural sentiment remains a risk for RBI’s growth projection of 8% but given India’s potential output growth 8% is achievable. Having said that we expect the divide between the GVA and GDP to continue for some time.

Q4. How do you anticipate foreign institutional investors (FIIs) will allocate funds into the Indian debt market?

In addition to JP Morgan inclusion led flows we are also witnessing flows in general from FPIs especially into Government securities market. We expect these flows to continue as expectations of global as well as local markets gets stronger.

Q5. Despite inflation easing, the US Federal Reserve has signaled that it will cut its key interest rate just once this year. What are your views on this?

The US economy has been facing one of the trickiest monetary policy dynamics. Inflation has eased but is still above its target range. Core inflation continues to remain sticky. The labour market has also started showing signs of normalization. But still cannot be termed as weak when compared to pre pandemic levels. In such a scenario the best bet that FED could possibly play out is to wait and watch. By Sep-2024 FED will have two more inflation prints and will have a better clarity on inflation trajectory. FED is cautious of early loosening.

Q6. What allocation strategy would you recommend for a conservative investor, with different time horizons: short-term (6 months to 1 year), medium-term (1 to 3 years), and long-term (5 years and beyond)?

Investor with short term investment horizon can positively consider investment in Money market and short duration category in light of our interest rate and liquidity outlook.

Investor with medium to long horizon can consider duration funds with varying ranges depending on the investors risk appetite.

Mr. Rahul Singh

Chief Investment Officer (CIO) – Equities, Tata Asset Management

With over 27 years of investment experience, Rahul Singh joined Tata Asset Management in October 2018 as CIO-Equities, leading the fund management and equity research teams.

In his previous role at Ampersand Capital Investment Advisors LLP, Rahul was the Managing Partner. He has also worked with many reputed financial institutions like Standard Chartered Securities and Citigroup Global Markets India as Head of Equity Research.

Rahul is a Bachelor of Technology in Mechanical Engineering from IIT Bombay and an alumnus of IIM Lucknow where he pursued his Master of Business Administration in Finance and Financial Management Services.

Q1. India's economic story looks promising with a projected GDP growth of 7.6%. How do you view India as an investment destination compared to other emerging markets?
Post immediate reaction of the equity markets to the Loksabha elections 2024 result, the medium to long term views on Indian equity market are expected to be robust. The Indian market is expected to have stable macros, strong earnings which would drive return. The market is expected to be more balanced, disciplined, strong and stock specific. This is expected to be supportive of bottom-up stock picking.

From a valuation front, valuation expansion is expected to normalize. Large cap is looking much better in terms of risk reward equation, compared to mid and small caps as large caps are lying at the lower end of 3rd quartile or 4th quartile in terms of performance.

Overall, India as an investment destination seems to be in a good shape.

Q2. Which sectors do you believe will attract or lose foreign institutional investors (FII) interest in the near term?

Considering the FII outflow as multi-year-high, in near term especially post election results, FII comeback is very unlikely unless market falls 5-7%. It's very difficult to expect them to come back in near term. The foreign flow is expected to be weak this year.

Q3. What is your outlook for Q1 FY25 earnings and sectoral performances across various sectors? Do you believe Q1 results will be better compared to what we saw in Q4 of FY24?

Indian markets are favorably placed on a global stage as India is one of the fastest growing large economy. The macro-economic factors remain strong and positive for the India-story with a capex cycle upturn. The earning growth continues.

Q1 FY25 result is expected to be better compared to what we saw in Q4 of FY24.

Sector performances :

Banking & financial - The Indian banking sector continues to remain in good health with an expectation of robust loan growth and healthy asset quality due to historically lower NPAs. This is expected to drive strong profitability growth trends in the coming years

Consumption- consumption is expected to get a boost led by enhanced government focus on welfare programs and rural spending. Consumer staple is likely to raise on rural support. There is likely to be more money made available, and taxations may get slightly tweaked to reduce the burden on common man.

Power, oil & gas- In a long-run, power or energy sufficiency will be the priority. Focus on renewable energy is likely to continue. In oil & gas sector, more exploration and drilling activities is expected to continue in order to meet higher demand and usage for natural gas & oil. Overall, We feel that there shouldn’t be any major change in stance plot.

Infrastructure - Valuations within the sectors seem overvalued and present a decent amount of risk. We continue to be incrementally cautious for the same. It is expected a slowdown in growth of government capex while private sector CapEx expected to pick up in order to compensate for the same.

Pharmaceutical – There is no major impact of election on pharma sector. The sector remains structurally positive.

Q4. Which are the top three themes on your radar for FY25 and why?

In the long run for FY25, Banking and Pharma sectors are expected to perform in the background of current valuations and expected growth trajectory. Due to coalition government, a little bit of focus is expected to come into rural economy, hence the consumer sector.

Q5. How frequently do you churn your portfolio and Why? What are the recent changes you have made in the portfolio?

The GARP (Growth at reasonable price) based valuation discipline which we have been maintaining across our funds, is expected to work now considering the current market scenario. Also across our funds, we had already started collecting our portfolio towards pharma and banking space. Banking and pharma is something which is coming out of our GARP philosophy. we will use this card to our advantage in a market like this because it's going to be a stock pickers market.

Q6. Do you think that in the current scenario it is the large caps that present a good tactical positioning versus the mid and the smallcaps?

Yes, Large cap is looking much more better in terms of risk reward and within large cap banking, pharma and consumer sectors are expected to do well. Midcap and small cap valuation is expected to go down while large cap valuation would go up, hence there will be a balance across market caps. More alpha can be expected in large cap space.

Mr. Murthy Nagarajan

Head - Fixed Income, Tata Asset Management

Murthy Nagarajan is the Head of Fixed Income at Tata Asset Management.

With an expertise spanning decades in the debt market, Murthy brings in a rich and valuable industry experience of more than 25 years in the financial services space.

Prior to his appointment at Tata Asset Management, Murthy was working with Quantum AMC. He was also associated with Mirae Asset Global Investment India Ltd in the Investment Department as the Head of Fixed Income for more than two years.

Murthy holds a Master of Commerce degree and has completed his PGDBA from Somaiya Institute of Management & Research.

Q1. What is your current assessment of the bond market, both globally and domestically? Are there any specific sectors or types of bonds you believe present significant opportunities right now?

Even though the next move in rates is cut globally, there is divergence in global rates with Bank of Canada and ECB cutting rates. US Federal Reserve and Reserve Bank of India resolute to bring down CPI inflation to their targets of 2 and 4 percent respectively.

Rate cuts is not expected in India during the calendar year. However, the increased demand and lower supply is expected to drive down interest rates, even without any rate cuts.

The estimates of the Indian Metrological Department is of normal monsoon which should cool down CPI inflation in the second half of the fiscal year. Inflation in food items is expected to moderate in the coming months if normal monsoon pan out.

The Bond market rallied due to RBI dividend payment of Rs 2.11 Lakh Crores. This amount is Rs 1.30 Lakh crores excess than what is budgeted in the interim Budget. This excess amount received by the Government is 0.37 percent of GDP.

Corporate bonds spread have fallen to historical low due to lower supply and high demand from end investors. In this scenario, Government Securities present better capital appreciation opportunities compared with corporate bonds.

Q2. In May 2024, yields on Indian government bonds (IGBs) fell by 12-15 basis points (bps). What could be the possible reasons?

1. US yields have fallen as unemployment rate moved towards 3.9 levels and

2. April non-farm payroll indicated moderation in economic activity, are the two possible reasons for IGB fall.

3. RBI dividend of Rs 2.11 Lakhs Crore, which is excess of Rs 130 Lakhs Crore should lead to lower borrowing in the current year.

Q3. It is expected that in the upcoming RBI MPC meeting on June 7, 2024, the RBI will maintain its current rate stance. What are your views on it?

On June 7, 2024, RBI Monetary policy is largely on expected lines, with no change in stance or policy rates. Continued focus to get inflation within target zone on sustainable basis, thereby indicating no near term likelihood of policy easing. MPC voted with a 4-2 majority to keep key rates unchanged (Repo Rate at 6.50%, SDF rate at 6.25% and MSF rate at 6.75%). MPC decided with a 4-2 majority to maintain stance as withdrawal of accommodation. RBI has indicated nimble systemic liquidity management on an on-going basis, with an objective of keeping overnight operating rate (WACR) aligned with stance of policy.

Q4. What risk management practices are you implementing to protect fixed-income portfolios in uncertain times?

We follow the SLR process, that is safety ,liquidity and subsequently returns when managing the fixed Income Portfolio. Our internal credit evaluation process is a objective stand alone process which is scaled down by corporate governance factor. Our rating is dynamic as we incorporate early warning signals in our model. Our rating transition is faster than the credit rating agencies which allows us to stay ahead of the curve in terms of downgrades or upgrades.

Q5. Most of the liquid funds have delivered 7% plus returns in the last 1 year. What made these funds deliver such returns?

Short end yield remained quite elevated last year due to tight liquidity condition and high credit growth. Credit growth continue to be robust with incremental credit growth higher than 100 percent for the last two years. Frictional liquidity due to high government balance and RBI keeping banking system liquidity in deficit to control Inflation has led to yield curve flatness , with the short end of the yield curve trading 75 to 100 basis points over the operating rate of 6.50. This has led to liquid fund generating returns above 7 percent levels.

Q6. Active debt funds garnered nearly Rs. 66,000 crore in net inflows in April, most at least since December 2020. What are the probable reasons for the surge in investor interest?

Debt fund flows increased due to corporate and banks investments during the start of the financial year due to expectation of rate cuts in US and India. This flow has come down in the subsequent month as both the Federal Reserve and RBI has indicated there focus to bring CPI inflation to target levels of 2 and 4 percent. RBI has upped its GDP growth forecast to 7.2 percent against 7 percent indicated earlier.