Asset allocation should be the theme in 2022, says Balasubramanian of ABSL Mutual Fund

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What will happen to my investments in the coming year, every investor is asking the question. ETMutualFunds has been regularly speaking to senior mutual fund managers to help investors to get an insight into the market. Shivani Bazaz reached out to A. Balasubramanian, MD & CEO, Aditya Birla Sun Life AMC Limited, for his view on the markets in the coming year.Edited interview

Mutual fund investors made very good returns in 2021. As the year is coming to an end, what are your thoughts?
2021 was a mixed year from an economy and stock market point of view. Stock market of course did exceedingly well, interest rates remained low and all sectors were actually participating in the equity market, generating a huge amount of wealth for the investors for all those who came in last year and also all those who have been investing in mutual funds for many number of years.

Also, 2021 is a year when there has been an increased level of participation in the capital markets assets, especially equity, coming from millennials as well as from people who have never made investment in equity. The index touched all-time highs, an indication of hope, optimism and growth coming back.

Though we are seeing some correction like we have seen in the past cycles, there are signs of recovery as seen in normalisation of business activities and the earnings posted by corporate India. The Q2FY22 earnings season was better than expected, driven by sectors such as Technology, Private Banks, Commodities, and Consumer & Retail. As the year comes to an end, I feel India has stood resilient in the face of a ravaging pandemic and its many supply side concerns.

As we come to the end of 2021 to usher in a new year, I think there is much to look forward to in terms of putting the Covid related concerns behind us gradually and business activities intensifying further. The recent volatility would have set some sort of a question mark in terms of sustainability of the market momentum, but it appears that the volatility will not be significant enough to create damage for the market. Therefore, I would assume the market momentum would remain.

Also, the China factor has now created a debate among global investors that emerging market has to be looked at as ex-Japan and ex-China. If that happens, then India would probably be one of the most recognised and respected market within the emerging markets. Therefore, that will keep the overall positive outlook on India even from global investors point of view.

The year is ending on a cautious note. Omicron, rate hikes, liquidity… many questions need to be answered. How do you view the situation?
Two big factors to monitor in the coming year will be the spread of new Covid variants and the trajectory of Fed tapering and rate hikes. While one needs to be watchful of new Covid variants, like the recent Omicron, but given the increased vaccination numbers and even booster doses coming through in certain countries, the severity may not be to the extent one had seen in the first and second wave. Both central and state governments are also better prepared now to handle it.

The other factor is the speed of Fed tapering and rate hikes. However, with the new Covid variant coming into the picture, we will need to see whether it will slow down the Fed’s tapering and rate hike plans. Fed Governors will consider sustained and stable growth before any kind of aggressive moves and so will RBI. Closer home two important events happen in the month of February, the Union Budget and the RBI MPC. So all eyes will be on that.

Mutual fund investors are apprehensive about the future course of the market. What is your view?
I will answer this in two parts. Firstly, volatility is part and parcel of markets. In fact to evolve into a seasoned investor one has to go through a full market cycle and several such market cycles. Unlike direct equity, mutual fund investors have the benefit of a tool like SIP, which allows one to invest systematically even in small amounts and with the help of rupee cost averaging enables making the most of market corrections. The correction in equity markets over the past couple of months is providing a potentially good entry point. Hence it would be better for long term investors to maintain their target equity allocation and use every dip as an opportunity.

Secondly, even with potential monetary policy normalisation, inflation risk, or any incremental Covid wave, one can believe that the kind of market correction we had seen back in March-April 2020 will not repeat itself. It was led by a massive health scare and there were too many uncertainties. Markets today have already priced in many of the anticipated variables, and while there will be some consolidation, for a long term investor in this country there is much to look ahead.

New investors, possibly still influenced by the returns of last year, are very bullish about the market. What’s your advice?
New investors need to remember that they have just about started their investment journey, and while they have seen only one way rally, volatility is but an intrinsic part of the market. Going through the market phases will only mature them as investors in the long haul. The basic principles of investment remain the same. Building one’s portfolio focussed on one’s purpose, needs and a long-term perspective will help to achieve financial goals and generate wealth in the future.

An often-used adage is time in the market is important than timing the market, which while one may have heard many times, it is especially important for new investors. Focus on asset allocation and goal-based investing. More importantly, maintain a discipline in investment habits. Mutual funds that way is an effective category in building long term investment behaviour.

Should investors temper down their return expectations in 2022?
Q2FY22 GDP numbers present a picture of steady recovery in the economy. On y-o-y basis the headline number came higher than market estimates at 8.4%, aided by very negative base of -7.4% contraction last year. On a 2-year CAGR basis, which is a cleaner way to estimate, since it removes the base effects of last year, growth improved from -4% in 1Q and returned to positive territory at 0.3% which is quite respectable. Importantly, both industry and gross fixed capital formation returned back to positive territory after negative numbers in 1Q and there was a healthy rebound in services as well, though it still remain in negative zone. Nominal growth stood at 18% y-o-y and 6% 2year CAGR.

Remember these numbers are from July to September and at least in the first half of the quarter, Covid was still having a big impact in the economy. Since then most high frequency indicators suggested that the recovery momentum has gained steam. We expect sequential growth momentum to keep improving and upward revision in market consensus estimate of growth for FY22.

Now the reason why I state these data points is to give a perspective that while pre-pandemic level activities may still happen gradually, the cumulative effect of steps taken by the government and RBI will aid growth in the long term. So for investors there is every reason to remain bullish on India’s potential and its long-term growth story. In 2022 one can expect reasonably good growth coming back supported by good earnings. But having seen substantial returns from equity in 2020 and 2021 on the back of an unprecedented liquidity led rally, expectations from 2022 need to be normalised in the backdrop of gradual liquidity normalisation. It will be pragmatic to moderate return expectations if one is hoping to see the same levels as in last two years.

What are the main changes in investor behaviour you have noticed during the year?
Last two years (2020 and 2021) were remarkable in terms of retail participation in capital markets – both via direct equity as well as a consistent growth in overall monthly SIP book of the industry. We recently did an SIP survey, one of the insights from that was SIPs helping maintain investment discipline was the single-most important reason for 35% of the respondents to choose the systematic way of investing. This to me is an important finding to reflect the maturity of the Indian investor of taking their investment journey seriously.

Domestic flows have so far been fairly steady, we have seen significant retail participation in several IPOs, and while much of it may be driven by the bullish market sentiment, for me what is important is that so many more people have come to the equity market. This will only help to expand the market and enable more and more people to participate in India’s growth story for their own wealth creation. I see this as an important marker of the Indian investor taking their financial and retirement planning seriously.

As a seasoned debt fund manager, do you think interest rates are likely to go up in the new year? What is your advice to debt fund investors?
Central banks globally have played an extremely active role in addressing growth and market concerns ever since the pandemic hit in 2020. They have been aggressive to pump in liquidity, along with keeping interest rates low to act as growth enablers. But then it was an unprecedented time which required unprecedented measures and it isn’t something that was going to be a permanent state for the markets. So it is reasonable to think rationalisation of those measures taking place as we move forward.

With normalisation in economic activity and inflationary pressures largely driven by rising commodity prices, it would be fair to expect some kind of unwinding process. Through bond buybacks and closer home actions like VRR have been considered to take out the excess liquidity that was available. But central bankers are also taking into consideration that growth is not going to come back in a hurry and it will be a gradual process.

Hence, monetary policy actions such as interest rate hike will also happen in a gradual manner. I do not expect any sudden moves, but central bankers, such as the way Fed will prepare markets for any potential unwinding. Having said that, given the current market conditions, one cannot expect a rerun of 2020 and 2021. Hence, in 2022, interest rates are expected to rise marginally, but it may not be severe tightening as central bankers will wait for growth to come back meaningfully. But broadly the accommodative stance is not going to fade too fast since world economy is still recovering from the scars of the pandemic.

Given the anticipation around some increase in interest rate, it would make sense for debt fund investors to stay in the shorter end of the yield curve in categories like short term and ultra short term. Markets have already priced in some of the liquidity normalisation and beginning of rate hike cycles, in such a situation investors can also look at target maturity funds that offer a good roll down potential.

Should equity investors try to play safe during 2022? What would you tell investors?
Let’s call a spade a spade, markets will consolidate going ahead. But the correction won’t be big to damage long term prospects of the market. Every correction should rather be used as an opportunity to add and re-allocate/reposition where necessary. While asset allocation is an evergreen investment mantra, this year let this be the core theme of your portfolio. Categories such as large cap funds, flexi cap funds with their liquidity advantage and dynamic asset allocation by way of balanced advantage funds and multi asset allocator funds with their nature of diversifying risk are good picks to weather volatility. Invest in a staggered manner, something which SIPs will help you do and be cognizant of your risk appetite and time horizon to ensure portfolio construction happens in the right manner.