US President Donald Trump’s tariff threats have been keeping stock markets on tenterhooks in the past couple of months. However, A Balasubramanian, managing director and CEO, Aditya Birla Sun Life AMC, believes that foreign portfolio investors should make a comeback into Indian markets from June. He tells Ananya Grover that while the current volatility will continue, the incremental impact will be restricted. Excerpts:
The current volatility in the market is worrying. How do you read the situation?
In India, the entire market, including us, is of the opinion that valuations remain stretched. The reasons are lack of government spending in the first half of this year, leading to a fall in the gross domestic product; the Reserve Bank of India tightening the credit growth, adding to the slowdown in the overall growth momentum; and global volatility, which wasn’t there for quite some time has come back after Trump started making a lot of noise over tariffs. While nothing concrete has emerged so far, the market does not like uncertainty, especially on policy framework, growth uncertainty and decision making. The current volatility will stay, but given the fact that the market has corrected quite a lot, the incremental impact of uncertainty would get restricted.
How will Trump tariff decisions impact the market?
The change in the tariff could impact countries differently because of the interdependency. Given the fact that the US is dependent on almost every country, any change will also impact the US economy. However, given that the US is a large economy and has been the driver of the global growth, it will have some pluses. This could lead to a change in price levels. If the roaring US growth doesn’t come, there is a high probability of India turning out to be a little better, as growth aspirations remain high and a lot of moving parts are in place, including capital expenditure by the government, private capex coming in, make goods for Indian consumers first and large population.
The Budget announcement to drive the boost in consumption is a big decision. Therefore, from Indian market’s view point, we should look at two-three years of bull period. Having said that, 2025 will be uncertain, but incrementally, India would do much better. By June, FPIs are expected to return to India. By that time, the rupee-dollar rate should get stabilised, and lower noise levels on tariffs and the monsoon will drive the next round of growth.
At the start of this year, the fund house’s outlook was fixed income delivering 8-9% returns in 2025, and precious metals and equity markets giving 8-12% returns. Has it changed?
Fixed income carries roughly about 7-7.5%, and if interest rate reduction is going to be a trend, it naturally becomes 8%. But if interest rates go up, it becomes 6%, though I don’t think we are looking at that scenario. Equity should deliver an average return of 12-14% over a period of time. Whenever we get more than 14%, it should be considered lucky. This year, if the 12% doesn’t come and next year it becomes 24%, it will average out, so we should always look at a three-year period.
Have valuations started to moderate?
One good thing that has happened in the last three months is that concerns over valuations have ebbed. Adjusted for growth, it may be seen that 19 P/E multiple for the Nifty 50 is not a right number, but we cannot look at growth for one year. If we look at the next three-year period, 19 P/E multiple is a reasonable price to enter from the point of view of investors or money managers. It is a good time to look at stocks that can deliver two times the GDP return over the next three years.
What is your take on small- and mid-cap space after recent corrections?
We should not get swayed by valuations in that space. They definitely aren’t cheap, but they enjoy high P/E multiples because the rate of growth is higher than large caps. The space will continue to remain the most relevant from investors’ point of view. But money managers should look at companies from a variety of angles like governance, business, their vision for growth and other factors. We should look at this sector from a three-five-year perspective. The best time to invest in small-and- midcap is when there is a negative view.
Has the recent volatility created fear among new investors?
It’s not fear, but a reality check. This experience will teach a lot of new investors about the benefits of building portfolios for the long term. Each downturn feels different, but the volatility remains permanent. This should not be seen as a concern, but a learning curve.