The collective size of just the three equity schemes that Prashant Jain, executive director and chief investment officer at HDFC Asset Management Co Ltd, manages is over Rs 88,400 crore. Among his three marquee schemes, Jain has managed HDFC Balanced Advantage Fund since its inception, i.e., over 28 years. In the Rs 37 trillion mutual fund industry, no other fund manager has managed a single mutual fund scheme for as long. After a weak performance phase due to a narrow run on equity markets that punished the value style of investing, Jain’s schemes have made a comeback.
The Russia-Ukraine war may have started in February, but equity markets have been volatile since October 2021, presumably on the expectation of the US Fed raising interest rates from early 2022. Then, of course, the Russia-Ukraine war worsened it. The S&P BSE Sensex had touched 61,000 in October 2021, fell to 56,000 in December, rallied above 60,000 in January, fell to 52,000 in March and is back again at 60,000. Your comments on this volatility.
Equity markets staged a smart recovery from Covid lows when they traded below 50 percent market cap to GDP to around 110 percent during the last quarter of 2021. These levels are above long-term averages. Also, the crisis-induced loose fiscal and monetary conditions are expected to normalise. Therefore, some heightened volatility around these levels is reasonable to expect. The recovery in recent weeks is, among other things, a result of the view that the ongoing war will have a limited impact on the Indian economy and (that there will be) a tapering in FPI outflows.
Given the time correction over the last few quarters, currently, the market cap-to-GDP ratio of Indian markets is approximately 95 percent, which is reasonable. Markets have held up well despite significant FPI selling due to healthy domestic flows — direct and through mutual funds. This is an encouraging development and it reflects how equities have gained wider acceptance
Once you have local inflows with a long-term horizon, they have the potential to reduce volatility in equities. This, in turn, should make equities more acceptable over time, creating a win-win situation.
How will surging oil prices and rising inflation impact equity markets? And what are the sectors that could get affected by these factors?
Oil prices are a key issue for India. We are still vulnerable to higher oil prices, though the vulnerability has reduced over time. Unlike, say, 10 years back, software exports are now higher than oil imports. Growing services exports and oil import volumes rising at a much slower pace are improving our resilience to higher oil prices and that is one reason why the impact of the spike in oil prices on currency / markets has been muted this time. The large foreign exchange reserves have also helped reduce the volatility.
The key question is: where will oil prices stabilise, post the Russia-Ukraine war. If they settle lower, clearly it’s a positive. If they settle at meaningfully higher levels from where they are, it is negative for India. Given the underinvestment in the oil sector over the last few years, it is not easy to forecast oil prices.
How have you positioned your portfolio to counter the crisis and market uncertainty?
Generally, my funds are underweight in the consumer space and metals and overweight in banking, pharma, capital goods and energy.
Higher inflation and interest rates are supportive for banks, higher energy prices are positive for energy companies, the outlook for capital goods is positive and driven by low corporate leverage, healthy profitability and the positive outlook of exports. Energy inflation is not good for the consumer space as household budgets will be under pressure as well as margins. Given the energy inflation, conventional energy is finding favour once again.
Your strategy underperformed the markets post Covid but ever since the Covid-19 rally started, the performance has improved. Are you still convinced about your value style of stock-picking, despite the volatile performance over the last decade?
My approach to investing has been simple: invest in strong, sustainable, undervalued or reasonably valued companies and remain diversified. There is a clear preference for growing companies. However, when such companies become very expensive, in my judgement, the investment merit is weak over the long term. At such times, one should reduce exposure to these and focus elsewhere.
In line with this strategy, I had invested in IT in the 1990s, capital goods in the early 2000s, consumer / pharma in the mid / late 2000s etc. However, when these became very expensive, exposure was reduced.
This approach has generally worked well, and in the past, periods of underperformance were not too long. But this time the underperformance was for longer. I feel this was driven by extremely loose monetary conditions for an extended period, and by many other developments in succession of each other, the last one being Covid.
This approach did test the patience this time, but I am glad the performance has come back strongly, thus vindicating the approach once again. There have also been valuable learnings during this period, which will hopefully allow us to refine this approach.
How do you view the new-age internet-based companies that have been listed in recent times? Fund managers and experts say that they need to be looked at not strictly from a profitability point of view, but the way they have brought about disruption to traditional companies and their way of doing business.
These companies fall broadly into two buckets, where the road to profitability is visible and where it is not. The second category is in the ‘too tough‘ category for me. Valuing companies in the first category is akin to conventional companies though the range of outcomes is much wider and therefore one needs to work on multiple scenarios.
Over time, as these businesses mature, traditional measures like P/E, P/B, etc would become relevant.
How long do you expect markets to remain volatile because of the Russia-Ukraine crisis?
It’s hard to predict. In my view, equity markets, to a large extent, have priced in the Ukraine uncertainty unless there is a sharp escalation or more countries get involved. I feel that whenever this issue stops making the headlines, the focus will return to inflation and US interest rates.
If someone has to build her investment portfolio now, how should she decide on asset classes? Equities are volatile, fixed-income markets are looking ahead to interest rate hikes, and then there is renewed interest in gold due to the Russia-Ukraine uncertainty…
Long-term returns are influenced more by asset allocation than anything else. Optimal asset allocation varies from individual to individual but a guiding principle could be as follows: Divide your money into two buckets: risk capital and safe capital. Risk capital is that portion of wealth that you are not likely to need for the next 5-10 years and on which one can tolerate volatility. Invest this money in equities. Diversify across market capitalisation buckets (large-cap, mid-cap and small-cap) and across a few strategies.
What remains is your safe capital, where you cannot handle volatility or the investment horizon is not long term. This money is best invested in debt. Invest a small portion in gold. I like to call this the insurance part of the portfolio. We know that gold does best in crises, like war, economic turmoil, collapsing currencies and so on, i.e., where the value of physical and /or financial assets suffers. In such situations, only gold preserves purchasing power. Therefore, gold merits some allocation, though one hopes that it does not do too well!
International investing has become popular and investors invest in foreign stocks through mutual funds or directly. Many diversified equity funds also invest a small section of their portfolios internationally. None of your three equity schemes invests internationally. Why?One needs a lot of time and effort to analyse and understand international companies. The Indian market itself is very deep and broad, with several hundred companies in the investable universe and this list keeps growing each day. Hence, it is difficult for me to do justice to this space. Moreover, there are dedicated funds, either feeder funds or exchange-traded funds, that invest in international markets; investors can use these funds for international exposure.
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