'Indian economy will recover maybe not in a V-shaped but a U-shaped manner'

The market crash in March and then the rally amid the economic uncertainty have made it tricky to manage an equity portfolio. We speak to Anil Shah, Senior Fund Manager, Aditya Birla Sun Life Mutual Fund regarding how he is navigating these unusual times. He manages three funds: ABSL Equity, ABSL Mid Cap and ABSL Manufacturing Equity. ABSL Equity is a top-rated multi-cap fund that manages over Rs 10,000 crore in assets. Note that this interview was conducted on August 28, 2020 - before SEBI's regulation regarding allocation to various market-cap segments in multi-cap funds came.

While the market has rallied, the economic reality is grim. How do you reconcile these two while managing your portfolio?
These are times when one needs to be on maximum alert. It merits to keep going back to one's thesis in order to make sure that nothing is missed in terms of one's core thought process. We are seeing not only an unprecedented expansionary policy but also money reaching the hands of individuals in the West. So, it is clear that the West will see a better and a faster economic recovery as and when things come back to normalcy. At the same time, India has its own fiscal challenges and limitations of how much it can do in terms of fiscal stimulus, how much it can put in the hands of needy, or the extent to which it can help MSMEs or sectors which are worst hit because of the pandemic.

One needs to see whether the company in one's portfolio will see through this pandemic, which means we need to ask if the balance sheet is strong and liquidity is good enough. You need to start thinking what the 'new normal' will be like and how the sector and the stock that one has invested in, particularly where the portfolio is overweight, will be placed. It is imperative to keep having conversations with experts, read as much as possible and understand the changes which various sectors are likely to face post COVID.

The market, in pockets, will overshoot because liquidity is far higher than the pace of economic recovery. As a fund manager, our job is to see what it is that the market is pricing. Excessive exuberance, particularly if your research suggests otherwise, could mean that one needs to trim that particular stock and vice versa. Thus, it's really important to keep your thinking hat on all the time and keep looking out for substantial market mispricing.

In one of our past interactions, you had said that investing in unique ideas ahead of other market participants helps you perform consistently. What are the key drivers for the next phase of growth for the Indian markets? Which segments of the market do you see performing well?
Very clearly, the pandemic did not change the growth dynamics in the short to medium term for some sectors like pharmaceutical, consumer staples, etc. Your consumption pattern does not change dramatically. Yes, the delivery mechanism has changed as you have started avoiding the outside world. So these are some sectors which haven't changed due to the pandemic. Most of the companies in these sectors already had reasonably good balance sheets and because of this, the stocks in these sectors did not fluctuate as steeply.

Then there will be sectors which will take longer to recover. Airlines, hotels, malls, theatres will take time because they are first to get hit and last to come back as people try to avoid crowded and closed places.

As far as the stock market is concerned, what you are factoring in is very crucial. For instance, the occupancy in movie theatres is zero per cent because they are not yet allowed to open in most states. A year down the road, let us suppose the vaccine is available and people are free to move and you see occupancy moving to 20-25 per cent. From an economic perspective, on a year-on-year basis, that is a significant improvement. However, from a stock-market perspective, the market's expectation of the occupancy rate a year from now is crucial. If the market is already factoring in that a year from now theatres will be open and will have 40 per cent occupancy but if the occupancy ends up being 20 per cent, it will be disappointed.

So, theatres, hotels, airlines, etc., may see recovery next year but one needs to see if stocks of the companies in these sectors will do well next year.

What tweaks have you made to your portfolios in light of the structural disruption caused by the pandemic?
It is a constantly evolving world, not just because of COVID but even the geopolitical equations across the globe are changing. So, as a fund manager, I need to keep those things in mind as well. I need to assess if there can be a sector in India which can significantly benefit from these changes that are underway globally.

I think chemicals as a space was doing well and with the geopolitical winds changing, it could do even better as India positions itself as a major global sourcing hub for speciality chemicals. So, yes, I have incrementally invested in that space.

Additionally, I have invested incrementally in companies that are outward-looking - companies which are exporting from India and even companies that have businesses outside of India. This is because I believe the West, particularly led by the US, will probably have a V-shaped recovery. So, those companies' growth rates will be better in the next 18-24 months versus a company whose entire sales comes domestically.

Given the rally in mid and small caps, are you planning to increase your allocation to them in your multi-cap fund?
Over the last eight years that I have managed ABSL Equity, I have maintained an allocation of 25-35 per cent to mid and small caps. Of course, there will always be phases when a particular segment of the market will do very well. However, there are a few reasons as to why my allocation is very well-defined.

For a first-time equity mutual fund investor, normally wealth managers and advisors suggest that he should invest in a large-cap fund because the level of risk there is relatively lesser as companies are well researched. When the investor is looking for a little higher alpha, he comes to multi-cap funds, where he should be given an exposure of around 25-35 per cent of mid and small caps. If he still wants more of it, then there is the largeand mid-cap category, wherein you can have up to 35-45 per cent of small and mid caps. Further, there are pure mid- and small-cap funds if he wants to have a higher exposure to them. So, in my mind, this is how the staggering happens.

Secondly, this also brings about a lot of consistency. The investor who is coming in clearly knows what to expect. However, there are no defined restrictions in the multi-cap category. There exist funds in the category which have close to 90 per cent in large caps and there are also funds which have about 55 per cent in small and mid caps.

ABSL Mid Cap has lagged behind its peers and the benchmark over multiple time horizons. You've recently taken over the management of this fund. How do you plan to turn it around?
This mid-cap fund came to me in April this year. It is a new baby and it is a very different world from the multicap space. It is early days, but all I can say is that I will try and replicate my long-term consistency in this fund too.

You also manage ABSL Manufacturing Equity Fund. Can you please tell us more about this fund? What does it offer that a plain vanilla multi-cap fund doesn't?
Over the last six years, we often talked about 'Make in India'. It is important to manufacture in India because we have moved from being an agriculture-based economy to directly being a service-based economy through banking, telecom, IT services, etc. So, India never got its manufacturing right. If you see the contribution of the manufacturing sector to the GDP, it is at an all-time low, whereas the contribution of services to the economy has increased rapidly over the last two decades.

This is a fund which invests predominantly in the manufacturing domain driven by 'Make in India'. It cannot invest in banking, telecom, airlines or anything that's not manufacturing. It will invest in sectors such as consumer goods, consumer durables, pharma, chemicals, auto, etc. The fund has done pretty well since launch despite manufacturing not exactly picking up in India.

India's manufacturing sector has been hit hard, given first the lockdown and now safety-related concerns. When do you see a revival?
We have already started seeing signs of revival. In fact, every month has been better than the preceding one. I do believe that India will see a slow and steady recovery over the next 12-18 months. A few segments, such as those coming under large-ticket discretionary spending, could take longer.

The sudden crash and then a swift recovery have made some investors withdraw from equity. How has been the redemption pressure with the funds you manage? How do you see the net flows into equity funds in the foreseeable future?
We have not seen major redemptions in any of the three funds that I am managing. Having said that, if investors are making money and want to take some profits back home, then why not? If they make money by redeeming at good levels, then they will always come back.

It is always good when money is being made and investors redeem to take profits. It is unfortunate when investors redeem their units out of desperation and if markets are sinking every day because then they are acting out of frustration and may have given up on equity markets. But if they are redeeming at good levels, they are doing so in a happy state of mind and will eventually come back having experienced the benefit of such an investment.

At your fund house, how have you managed investor anxiety lately? What would be your advice to investors as far as the future economic uncertainty is concerned?
We have maintained continued communication with our investors through various modes. When the pandemic broke out, we communicated that this was a passing phase and that the global policymakers and central bankers would have to act. We told investors not to panic and to continue with their SIPs. Again, in May-June, we communicated that things were stabilising on the back of policy measures in the West as well as in India and it was a good time to put your money to work. However, I will admit that I didn't see the extent of the recovery to be as sharp as we are seeing now.

In recent times, we are communicating that there could be a little bit of time correction in the market, given the frenzied rally we have seen in recent months. Markets, we believe, may pause and wait for the economy to show further signs of recovery. In the long term, Indian economy will recover maybe not in a V-shaped but a U-shaped manner. Over the next two-three years, we will see better times. This is a good time to incrementally increase equity exposure and in the next six to nine months, investors can use dips to invest for long-term gains.