Earnings to remain volatile in FY24, but some sectors will benefit from lower energy prices, says Aditya Birla Sun Life MF’s CEO A Balasubramanian

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Earnings to remain volatile in FY24, but some sectors will benefit from lower energy prices, says Aditya Birla Sun Life MF’s CEO A Balasubramanian
Source: Company
  • We are bullish on gold and silver as a fund house due to 2 reasons – recession and under ownership, says Balasubramanian.

  • There may not be any further rate hikes as we are near the peak of the interest rate cycle, he adds.

  • An investor should look at passive investing as an additional investment avenue and not at the cost of large cap funds, he says.
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The start of the earnings season has been mixed, with IT services players disappointing the markets. Going forward too the trend is expected to remain mixed. While lower commodity prices will impair earnings of producers, the benefits will be reaped by consumers of energy and other commodities. In conversation with Business Insider India’s Malini Bhupta, A Balasubramanian, CEO of Aditya Birla Sun Life Mutual Fund, says that even though FY24 earnings could remain volatile due to a possible recession and high interest rates across the globe, but that does not mean all companies will be impacted in the same way. Domestic-driven sectors will fare better than exporters. Edited Excerpts:

Markets have gone nowhere in the last 12-18 months. Will this dry run continue much longer and what should investors do?

Markets keep going through bullish, bearish and consolidation phases at various intervals of time. We have been in a consolidation phase for the last 12-18 months. However, investors should invest for the long-term and the attractiveness of India remains very high in that context compared to the rest of the world. Indian equities have been resilient despite the interest rate movements. Valuations would get adjusted as rates start coming down and as a result equities will start reflecting momentum once again.

Earnings trajectory has been on the upswing, but this fiscal year has already started seeing downgrades. What will impact earnings in FY24?

FY24 earnings could remain volatile due to a possible recession and high interest rate scenario across the globe. Earnings volatility will impact stock prices but that does not mean all companies will be impacted in the same way. Some companies will benefit from lower energy prices, some will gain from rural recovery while export driven industries are likely to face some headwinds.

From a returns point of view, ETFs are beating most large cap actively managed funds. What does this trend portend for investors?

Index based investing is on the rise and has been gaining popularity. However, it should be looked upon from an allocation perspective. An investor should look at passive investing as an additional investment avenue and not at the cost of large cap funds.
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What kind of returns can investors expect this year?

Returns should not be measured on a one-year basis as a good year can be followed by a bad year and vice versa. One should look at the cumulative returns delivered by equities over the long-term as an asset class. Equities tend to return nominal GDP + 3% and I expect good returns to be generated over the next 3 years.

A lot of thematic funds have been launched. Are these funds launched to garner AUM or are these opportunities that fund houses are seeing in the market?

Thematic funds should be looked at opportunities to invest in a particular theme and from an asset allocation point of view. Themes can be structural or cyclical in nature and go through their fair share of volatility. IT, banking, manufacturing, consumption and MNC are some of the themes offered by Aditya Birla Sun Life Mutual Fund.

Average age of benchmark indices have been coming down. What is the reason for that and how does it impact stock picking?

New technologies are coming and acceptance of these on both the investor and consumer side has grown significantly. Companies get included or excluded from an index basis the methodology followed by the exchanges. Some of the long-lasting businesses have been part of the index for over 2 decades while some companies that have survived have still been excluded from the index. It does not mean that those that are removed are bad except that they have not grown as much as others or those that are included are good. The large groups in business will remain relevant.

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Given that interest rates have gone up, is this the right time to invest in fixed income?

The current attractiveness of debt is higher if you compare the yield to the earnings yield of equities. A higher yield implies high cost of capital which is unfavourable for equities. However, I believe both will co-exist. Given the long-term tax benefits have been removed for debt funds, the question to be asked is whether investment is being made for tax benefit or for asset allocation purposes.

Do you expect flows into debt to be impacted by the recent tax changes?

It will have some impact as those who have been considering these instruments for the long-term will be impacted. However, 70-80% inflows have been coming in for 1-2 years and not just for tax benefit. Those flows will continue. Secondly, mutual funds fixed income recognition is different from others, which is short-term capital gains accrual. Therefore, it gives some leeway to adjust against short-term capital losses. Also in growth funds, you can accrue the gains and not withdraw it so that you only pay tax on withdrawal.

Will the Reserve Bank of India’s pause on rates be a prolonged one?

There may not be any further rate hikes as we are near the peak of the interest rate cycle. I expect the rates to hover near the current levels for the next one year and interest rate cuts may only start next year onwards. Moreover, the rate cuts may not be as aggressive as the hikes.

Is the inflation battle under control?

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Energy prices are a true indicator of inflation and the recent correction in gas and energy prices has arrested the fear of inflation going up further. On one hand, the production cut from OPEC will prevent a further fall while on the other hand, the government of India has ensured there are no supply side disruptions which can lead to higher prices.

Given the geopolitical risks and what’s happening to the dollar, what is your view on gold and silver?

We are bullish on gold and silver as a fund house due to 2 reasons – recession and under ownership. We have been advocating a multi-asset allocation strategy which invests in equity, debt and gold.
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