ETMarkets Fund Manager Talk: Debt/balanced funds to outperform equity funds near term: Rahul Bhuskute, Bharti AXA

How do you expect equities as an asset class to perform over the next 6 months? What are the major downside risks?
I think Indian equity markets would continue to remain under pressure over the next 3-6 months, in line with all the other major equity markets in the world.

High interest rates would continue to pose a challenge to equities as an asset class over the foreseeable future.

“Credit risk” events have slowly started to emerge, where leveraged balance sheets sustained on the base of “lower-for-longer” interest rates finally face their day of reckoning.

Closer home, high inflation, led by food presents another challenge to the markets. With the Rabi crop already affected, the worry now is that El Nino would damage prospects of Kharif sowing too.

As such, it is difficult to see beyond flat-to-single digit returns from the index this year.

The possible positives could emerge from RBI decoupling from Fed cycle if India inflation falls earlier than expected.
How much AUM do you manage and how has your portfolio performed in the last 1 year?
We manage about Rs 13,000 crore in AUM with approximately 85% in debt and 15% in equities. Our lower allocation to equities also reflect our cautious stance on the equity market for the first half of FY24.

Over the past 12 months, our funds – across debt and equity – have outperformed their respective benchmarks, predominantly due to our bearish stance on both debt and equity markets over the last year and a half.

What is also worth highlighting is that our funds have maintained their outperformance versus their respective benchmarks over a longer horizon of 5-year and 10-year period with funds outperforming their respective benchmarks. Funds continue to be rated well by independent agencies – and that has been a long standing trend.

While SVB and Credit Suisse collapse don’t have a direct impact on Indian banks, do you think it has shaken investor confidence in the system?
The Indian banking system appears in the pink of health, especially compared to the US system (at least some of the weaker banks there) as also its own situation over the last decade especially between 2013-2018.

The Indian banking system has emerged out of the recent credit cycle much stronger. Banks are well capitalised, and have improved their liquidity ratios significantly, especially

the mid-tier banks. RBI’s SLR and LRC guidelines also ensure banks hold enough liquid assets to take care of deposit withdrawals.

As such, the Indian banks appear quite resilient from both liquidity and solvency perspective. In fact, the BFSI sector in India appears to be among the best bets over the next year to two.

The Nifty 50 is currently trading at 20x its trailing valuations for FY23. Which sectors or pockets look attractive and offer buying opportunities?
Indian equity market valuations have come off over the past 12 months. Having said that, they still remain above their long-term average, despite a cautious outlook.

We believe top-down approach will be less effective during uncertain times and bottom-up stock picking will likely outperform instead.

During times of uncertainty, we see higher earnings and valuation risk to small and medium cap stocks and, hence, prefer largecap stocks.

We like financials from a structural long-term perspective, given the strong credit growth, vastly improved asset quality and attractive valuations after the recent correction. Not just banks, even NBFCs, life insurance companies and others appear to be solid businesses with decent growth runways available at reasonable valuations after a fair bit.

While we might have a positive outlook on only the financial sector, we see ample stock specific opportunities in other sectors to generate alpha.

As we enter a new financial year, how do you expect it to pan out for markets and what kind of portfolio allocation will you recommend to retail investors?
We maintain a cautious view on the markets for FY24. We expect to continue with the larger debt allocations seen in FY23, in the initial part of FY24 as well.

We expect to tactically allocate to equity in 2HFY24 as valuations and earnings yields turn favourable.

We expect the rate hike cycle to peak in early 1HFY24 and these will be good rates to lock-in. There is, however, no easy money to be made in either the equity or the debt markets in FY24. Retail investors are advised to continue with their SIPs or investments keeping in mind the longer term horizon.

In equities, large cap blue chip stocks are expected to be safer in the face of growing macroeconomic headwinds.

Debt or balanced funds are likely to outperform equity funds in the near term. It would also be prudent to maintain a certain portion of the portfolio in cash/deposits in the near term.

In the long term, equities outperform most asset classes and we would recommend higher allocation here, with a 3-5 year horizon.

In the near term, however, debt could provide more opportunities to realize strong returns in the market.

Equity inflows have so far been positive despite the market volatility, but do you expect this trend to continue unabated and why?
Equity inflows have been positive so far in FY23, supported by SIP flows which continue to grow steadily. DIIs have been able to offset most of the FII outflows in FY23.

We have seen very strong discipline from retail investors who have now understood the importance and power of compounding.

Even in the face of macro-economic slowdown, investors seldom change their monthly SIPs and may even look to increase their amount based on market attractiveness.

We do not expect a big slowdown in SIP flows unless there is severe recessionary pressure. Equity inflows are expected to continue despite uncertainty and with a positive outlook in the longer term.

India is expected to be one of the fastest growing economies in the world, a solid domestic consumption story with favourable demographics and relatively low geopolitical risk. Indian equity markets provide a lot of opportunities for long-term investors to build wealth. Even if near-term decision making is clouded by the recent developments in the US, India remains a strong structural story and one of the few pockets of growth globally. Reduction in premiums to emerging markets is also likely to drive FII inflows in the next few months.

What kind of asset diversification would you recommend investors today keeping in mind the overall risks and the plethora of opportunities?
Year 2023 looks like it will be the year of debt, with rates expected to peak in early 1HFY24. Within fixed income, we have been bearish on corporate bonds spreads since the last one year and tactically kept higher allocation in government bonds.

We are seeing bank lending rate increasing further which will make bank funding to corporates more expensive as compared to capital market funding.

We expect corporate bonds spreads to widen from 2HFY24. Hence, a tactical increase in corporate bond allocation then will enhance portfolio returns. We continue to be negative on REITs and InvITs in a rising interest rate environment.

Investors are also beginning to realize the benefits and importance of cash as an asset class. We continue to prefer equities for the long-term horizon.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)