Correction is not a worry, but a bubble in small caps could be: Rahul Singh, Tata Asset Management There are some things that are in our hands, and some that are not. "
Since small-cap funds were getting too much money, Tata AMC stopped accepting lump-sum investments to prevent the fund manager from making mistakes, Rahul Singh, CIO, Equities, Tata Asset Management tells ET Wealth.Of late, the markets have been very volatile. Do you expect this to continue?
We are quietly optimistic and quite excited. In fact, as fund managers, we have been waiting for this kind of market. The economy is not dependent on consumption anymore. It is now being driven by the revival in investment cycle, both private and government. Once this happens, it leads to two things. One, the growth rate becomes more sustainable. Two, the market becomes more broad-based. The sectors that start doing well are not the sectors that did well in the last uptick. Therefore, even if the markets remain flat or move 5% up from here, there will be humongous opportunities to generate alpha and create outperformance.
Does the slowdown in the GDP growth rate worry you?
I think India’s GDP growth rate will be in the 5.5-6% range. Remember that the world is slowing down and, in this scenario, 5.5-6% is a very good number. I don’t believe in a 6.5-7% growth rate because that will need too many things to go right. This isn’t necessarily the case today. If it achieves 7%, it’s good for us, but I don’t think we are going back to 4%.
The sovereign debt has shot up in the past few years. Is that a worry?
No, not really. Any debt is sustainable if the nominal GDP growth rate is higher than the interest rate. In such a case, the debt is serviceable and you’re not in a debt trap. The nominal GDP growth rate today is 10%, while the 10-year bond yield is at 7.35%. So we are not in a debt spiral, which is what seems to be the case in the US. In the past 2-3 years, the fiscal deficit has tilted towards capex, not just subsidy. So the spending is going in the right place.
If capex is taking off, can we expect the infrastructure sector to benefit?
I would like to qualify this by saying that our traditional understanding of infrastructure is very different from what existed 10-12 years ago. Today, we have a mix of power stocks, PSUs, railways, defence companies, which are generally low on debt and good on governance, compared to 10-12 years back. Of course, the valuation always seems to run ahead of the fundamentals. So one needs to constantly evaluate the kind of stocks, companies and sectors you want. The small-cap segment has seen massive inflows. What’s your take on this? I sincerely hope that we don’t create a bubble. My biggest fear is not a correction. It is a sharp rally in small caps because that will create a bubble. We are not in a bubble zone yet, but we are not too far away.
Do you think investors in small caps understand the risk involved?
Nobody really factors it in, and when the correction finally happens, everyone asks the same questions that they should not be asking if they had invested in small caps. There are some things that are in our hands, and some that are not. What we can do is prevent the bubble from being formed. Our small-cap fund was getting too much money, but we were able to deploy only 20-30% of the inflows. We did not want our fund manager to be pushed into making mistakes, so we stopped accepting lumpsum investments about 2-3 months back. It’s not that we are negative on small caps, but we don’t want to commit mistakes.
Even mid-cap funds have seen a lot of inflows. Are you planning to make some adjustments there too?
Fortunately, or unfortunately, our mid-cap fund is small. We have a Rs.2,300 crore fund, whereas our small-cap fund now has Rs.6,500 crore. So the urgency to do something in small caps for us was much greater. Some fund houses have large-sized mid-cap funds of Rs.15,000-20,000 crore. They should be the ones to stop accepting investments, not just as lump sums, but all inflows.
What about large caps? Is there still a lot of headroom for these to grow?
Yes, in the near-term, large caps are looking more reasonably priced. Some of these, especially a few banks, are still trading at valuations that are at 10-year average. I would recommend a decent allocation to balanced advantage funds (BAFs). BAF returns have been as good as Nifty, with much lesser volatility. The way markets are positioned today, global risks are rising and volatility is high. These developments are unpredictable. Ukraine happened overnight, and now the Middle East conflict could become bigger.
We have already seen oil prices go up 10% since the conflict started. What’s your view on this?
Yes, this is where India is impacted the most. This is where inflation, fiscal deficit, current account deficit, everything goes for a toss. That’s why BAFs are a good option in today’s market. Most BAFs, including ours, currently have around 50% equity allocation. If there is a correction, we can go up to 60-70%, even 80%. BAFs are best positioned to take advantage of the volatility.
Gold does well in times of uncertainty, but it has not performed. Why?
I don’t have an answer as to why gold has slipped when there are so many reasons for it to go up. Gold will go up only if there is a big global recession, which is not happening. Initially, everyone thought that the US would go into a recession. While the US economy has slowed down, it has not gone into a recession. There was also a de-dollarisation theory, which suggested that everyone would move away from the dollar, but there’s no alternative to the dollar yet. At the same time, one should not give up on gold as an asset class. It’s like insurance. You buy and keep it, and one fine year it might give 25% return. As to which year this will be, you can’t predict.
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This story originally appeared on: India Times - Author:Faqs of Insurances
