Get the asset allocation decision in terms of equity allocation right rather than continuously trying to rebalance what will be the next best performer for the next six months or 12 months, says Vetri Subramaniam, Head – Equity Funds, UTI Asset Management.
What is your view on the year ahead? What are you looking forward to — structural reforms or fiscal stimulus?
I do not think it is one or the other — both need to be done. We have seen some excellent supply side measures in agriculture, changes in the labour code and also production-linked incentives which should hopefully enable India to participate in global supply chains. But the recovery in the economy has not been even. There are many industries, many people who have been left out and there is still a crying need for both targeted humanitarian assistance to individuals as well as to industries by way of fiscal stimulus to ensure that everybody gets the velocity and escape trajectory to break free of the Covid-related challenges that we have faced this year.
Do you think it is now going to be about the financials on the back of the expectation that we will now see a consistent recovery going forward?
The one point that I would make is that the stock market is not a place for normal distribution. People who look for equality in terms of outcomes are coming to the wrong place. Capitalism is a winner take all model. Benefits accrue disproportionately to stronger companies and one has to take that as a granted rather than continuously argue for equal participation by all companies at the same point of time. There will be different phases of the cycle where some companies or some sectors might outperform. It is par for the course.
At this point of time, it is really advantageous for large listed companies because there has been a significant supply side disruption. There is lesser competition and there are market share gains accruing to larger companies that have been able to put their supply chains back in place both on the manufacturing side as well as in terms of getting the products across to customers. So one should identify companies that can benefit from the kind of challenges that Covid has posed.
My view is that it is the stronger as well as the leaner and fitter companies which will come out of this growing twice as fast. This is going to happen even in areas like financials where given the recovery in the economy, it has perhaps been much better than what our worst fears were six months ago. There is a case for greater consolidation in financials with certain institutions benefiting disproportionately as compared to the others.
What would be a safer way to look at investment scenarios with decent average return expectations?
Let me answer that in two different ways. Given the new construct of the Indian economy where you got the inflation-targeting monetary policy committee looking at 4% inflation, you give a little bit of a mock up of that for the risk free rate may be anywhere between 5.5% and 6%. We are operating in an environment where from an asset allocation perspective, you need to look at equities as an asset class with 11-12% expected rate of returns over the medium to long term. It is not a 15-20% return asset class.That is point number one.
Point number two is that we spent too much time to think about which particular sub segment of equities — be it midcaps, smallcaps, a particular theme or a particular sector — do far better in the next six months or one year. People would be served far better if they thought about their portfolio more from an asset allocation perspective rather than trying to sweat exactly which sub component of equity that they need to have exposure to.
In the current Sebi framework, I would broadly recommend that the multicap funds which invest across largecaps, midcaps and smallcaps are very attractive. Sebi has now given a new template and so may be the preferred category going ahead would be in that flexicap category because those portfolios would have exposure across the market cap spectrum. But I would say most investors would be better served by getting that asset allocation decision right in terms of equity allocation rather than continuously trying to rebalance what will be the next best performer for the next six months or 12 months.