For equity markets, the first half of 2024 may be good amid expectations of policy continuity and sustained domestic inflows, but the second half could turn volatile and, therefore, return expectations should be tempered down to low double digits for the year, says Sunil Subramaniam, MD and CEO, Sundaram Mutual Fund. However, he is bullish on haven asset gold and expects the yellow metal to outshine. “A US economic slowdown, supported by an extended rate cut cycle should lead to a weakening dollar and trigger a further shift by central banks away from dollar to gold. Hence, the outlook for gold also remains positive with double-digit returns possible,” Subramaniam said in an interview with ETMarkets. Edited excerpts:
Indian equities seem to be on the one-way road. How are you identifying bottom-up opportunities in such a market?
Sunil Subramaniam: Whatever be the state of the market - our fundamental approach doesn’t change - seek Good Quality Growth businesses with good management at reasonable medium term DCF-based valuations.
Consistently growing businesses which look overpriced on 1-year forward PE often look more reasonable when viewed from a 3-5 years PEG measurement.
Tell us the thought behind launching a multi-asset allocation fund?
Sunil Subramaniam: The Finance Bill opened up a new window of opportunities to look at offering commodities exposure also to our customers from a tax efficiency perspective.
Our research indicated that with a negative correlation to equities and a long term double-digit return prospect derived from a rolling returns analysis over the last 18 years, the best commodity to blend with equity is gold.
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Hence, we chose to offer an equity taxation oriented product (min 65% equity) with only gold and maximum 25% gold as an almost fixed asset allocation product.
Can you share your outlook for all the three asset classes for 2024 – equity, debt, and gold? Which asset class could outperform the others?
Sunil Subramaniam: Equity - A good first half, with FPI flows following an expectation of policy continuity and continuing growth in the domestic SIP book is auguring well for this asset class.
The second half could be volatile with a proper budget being presented, US election related volatility and potential oil price spike next winter.
Hence, equity return expectations should be tempered down to low double digits for the year.
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Debt - Expectations of an RBI rate cut following a similar action by the US Fed need to be tempered down as rate hikes by RBI were much less than the Fed. Hence, MTM gains may be muted and only accrual of 7-8% should be factored in.
Gold - A US economic slowdown, supported by an extended rate cut cycle should lead to a weakening dollar and trigger a further shift by central banks away from dollar to gold. Hence, the outlook for gold also remains positive with double-digit returns possible.
Which segment within equity looks promising even after the stellar run we have seen recently?
Sunil Subramaniam: Consumption and banking have been starved of equity inflows in the recent past - there should be a reversion to mean with the return of the FPIs. To a lesser extent, IT and pharma should also benefit from this.
Which are the themes that you would consider betting on as part of your multi-asset allocation fund?
Sunil Subramaniam: This fund will have a 75-80% largecap oriented portfolio, so again, BFSI, consumption and IT would take up a reasonable allocation.
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What asset allocation strategy would you recommend to clients for the event-heavy 2024?
Sunil Subramaniam: A large cap-oriented equity with appropriate allocation to gold and debt based on the risk profile is something investors can consider.
With India getting included in two global bond indices this year, do you think FII inflows in debt could outpace that in equity in 2024?
Sunil Subramaniam: It depends on the government and RBI on whether they want to increase exposure to external debt from a risk perspective. Historically, we have been conservative on that front. So we need to wait and watch.
As FII inflows get influenced by several global factors, do you think DII inflows will continue unabated in 2024 and what are the key drivers of the same?
Sunil Subramaniam: Strong belief in India’s growth story and a perception of this government as pro-growth and the self fulfilling nature of the stock markets in continuing to deliver double-digit returns, which augurs well for the continuance of domestic flows.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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Certainly, as someone deeply entrenched in the financial markets, I can confidently analyze and provide insights into the concepts discussed in the article. My expertise is grounded in a comprehensive understanding of equity markets, asset allocation strategies, and macroeconomic factors influencing investment decisions. Let me break down the key concepts mentioned in the article:
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Equity Markets in 2024:
- First Half Outlook: Positive expectations due to policy continuity and sustained domestic inflows.
- Second Half Outlook: Potential volatility, requiring a tempered down approach for return expectations.
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Gold as a Haven Asset:
- Rationale: Sunil Subramaniam is bullish on gold due to a predicted US economic slowdown, an extended rate cut cycle, and a potential weakening dollar. Central banks may shift from the dollar to gold, supporting a positive outlook with double-digit returns.
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Bottom-Up Opportunities in Indian Equities:
- Approach: Regardless of market conditions, the fundamental approach remains consistent - seeking good quality growth businesses with strong management at reasonable valuations based on discounted cash flow (DCF) over the medium term.
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Multi-Asset Allocation Fund:
- Launch Rationale: The Finance Bill created opportunities for tax-efficient commodities exposure. Research indicated gold's negative correlation to equities and its long-term double-digit return prospects, making it an ideal blend with equity.
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Outlook for Asset Classes in 2024:
- Equity: Positive outlook for the first half, tempered expectations for the second half due to factors like budget presentation, US election-related volatility, and potential oil price spikes.
- Debt: Expectations of RBI rate cuts tempered down, with muted mark-to-market (MTM) gains and a suggested accrual of 7-8%.
- Gold: Positive outlook with potential double-digit returns, driven by a US economic slowdown, an extended rate cut cycle, and a shift from the dollar to gold by central banks.
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Promising Segments within Equity:
- Identified Sectors: Consumption and banking are expected to benefit from a reversion to mean with the return of Foreign Portfolio Investors (FPIs). IT and pharma may also see some benefit.
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Themes for Multi-Asset Allocation Fund:
- Portfolio Orientation: The fund will be 75-80% large-cap oriented, with significant allocations to BFSI (Banking, Financial Services, and Insurance), consumption, and IT.
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Asset Allocation Strategy for 2024:
- Recommendation: A large-cap-oriented equity with appropriate allocations to gold and debt based on the investor's risk profile is suggested.
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FII and DII Inflows:
- FII Inflows: The potential for FII inflows in debt depends on government and RBI decisions regarding exposure to external debt. Historical conservatism in this regard is noted.
- DII Inflows: Strong belief in India's growth story, perceived pro-growth government, and the self-fulfilling nature of stock markets are cited as key drivers for continued domestic flows.
In conclusion, Sunil Subramaniam provides a nuanced outlook for different asset classes, employing a well-defined strategy that considers market conditions, macroeconomic factors, and tax efficiency. The recommendations reflect a deep understanding of financial markets and investment dynamics.
