"Business cycles funds will become an important category"

Tata Mutual Fund has come up with their new Business Cycles Fund. These schemes are making their way into the Indian Mutual Fund industry. Rahul Singh, CIO-Equities, Tata Mutual Fund, says the economy seems to be between recovery and expansion stage at present thus favoring cyclicals. Singh also spoke about valuations and the bond yields now favouring value stocks. Edited interview: Tata MF has recently launched a business cycles fund. What is your view on the current business cycle? Where is the economy at? The fund will follow a macro investing approach and focus on sector allocation and concentration rather than bottom up stock selection – which is the primary style for other diversified equity funds. We believe that the Business Cycles Fund will become an important category in the years to come as cycles are becoming shorter and more unpredictable thanks to extraordinary fiscal/monetary interventions and external events – both domestic and global. The portfolio will therefore be characterized by a lesser number of sectors, and the market capitalization mix will depend on the stage of the economic cycle that we are in. In addition to the macro-economic cycles, industry specific dynamics also results in opportunities to create alpha and the fund will also focus on those opportunities. The economy seems to be between recovery and expansion stage at present thus favoring cyclicals. In terms of valuations, do you think certain segments have stretched valuations at this point? How do you navigate such a market? Headline valuations are at 10-15% premium to 10 year historical range but are supported by the lower bond yields in comparison to what we have witnessed in the last decade. In addition, India’s premium to other emerging markets, while approaching the higher end now, is supported by the pro-growth and pro-reform stance of the government and fiscal/monetary policy. Inflation risk and how that plays out into bond yields remain the biggest risk to equity valuations since as mentioned earlier the premium valuations have been partly supported by lower bond yields (the other contributors being bottom-up earnings and pro-reform policies). Over the medium term, any move to control bond yields despite inflation could be advantageous to emerging market currencies including India leading to liquidity flows to EMs. India’s standing within the EMs will depend on the earnings outlook and government policy. We are indifferent between the large and midcaps but certain pockets of small caps are looking overheated now. Which sectors do you think are better placed in such a market cycle? Financials led by large private sector banks and select public sector banks will benefit from the economic upcycle. In addition, certain pockets of industrials/capital goods are benefiting from green shoots in the capex cycle which is being led by automation, PLI and the potential investment cycle in commodities, thanks to improved cash flows and balance sheets. IT Services and the digital economy is benefiting from the increased spending on digital conversion of economic activities and transactions. Power sector valuations and long term sustainability can improve as the generation mix moves away from fossil fuels to renewables. Healthcare continues to be an under-penetrated sector and is getting the attention it deserved post-Covid. Mutual fund investors are fearing a correction as certain market caps have run up alot. Others are pushing money looking at past performance. What is your view? All things considered, the market appears to be around its fair valuation and hence the returns from equities will now track medium term earnings performance i.e. beyond the current fiscal year. There is a cushion from the bottom-up corporate earnings which have done well even during the second wave and the earnings recovery has been driven by multiple sectors this time. However, inflation risk and how that plays out into bond yields remain the biggest risk to equity valuations. What are the top dos and don'ts for mutual fund investors in a market like this?Lower bonds yields have supported the outperformance of “Growth/quality” over “Value” over the last 10 years. Given that the bond yields seem to be at an inflexion point and might have an upward bias, any investment philosophy heavily in favour of growth/quality needs to be watched closely. We advise investors to gradually move towards MF schemes with relatively low style bias or those that offer a good mix of growth and value. Also, given the interplay of strong micro and uncertain macro, investors should have a good mix of dynamic asset allocation funds (Balanced Advantage Funds) and Large & Midcap/Flexicap funds as core and can reduce the allocation to pure small cap category. We are indifferent between the large and midcaps but certain pockets of small caps are looking overheated now.The views expressed in this article are personal in nature and there is no way of trying to predict the markets or to time them. The views expressed are for information purposes only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. Please consult your Mutual Fund Distributor before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund.

from Economic Times https://ift.tt/3x01spw