The consumption story is showing signs of stress due to a decline in credit growth. But A Balasubramanian, MD, Birla Sun Life Mutual Fund, tells FE that the regulatory action by the Reserve Bank of India on non-banking financial companies and micro finance institutions was needed to ensure that the economy does not face any unpleasant surprises. Excerpts:
The stock market has been falling in the past month due to foreign institutional investors (FIIs) going on a selling spree. Do you see the retail and high-net-worth individuals also start selling?
The Indian equity market has been moving within a range, owing to FII outflows on one hand and general weakness in sentiment on the other. Recent corporate earnings are also very mixed, creating some element of volatility. Despite FII outflows being among the highest, driven mostly by a pick-up in China, domestic institutional investors have turned out to be a strong counterforce to absorb the FII selling. As a result, general concerns about high valuations have also been corrected, with a few sectors facing selling pressure and muted growth expectations in the near term.
Looking at the long-term outlook for India, I feel Indian retail investors will continue to place their faith in the Indian capital market, purely based on the experience they have witnessed in the last few years. In fact, the investment experience for Indian investors over the last 10 years has been so positive that it has made them realise the importance and necessity of continued investment in equity as an asset class. Keeping this in mind, while overall volatility may persist, Indian equity is likely to have limited downside, so to speak.
What factors could bring back FIIs?
As we move forward, FIIs’ allocation towards emerging markets is likely to increase, driven by two factors: first, the search for growth economies worldwide, and second, falling interest rates, which may provide the necessary leverage to boost allocation towards emerging markets. One must note that, within the emerging markets, India is the most promising market, with clear visibility on economic growth, political stability, and strong corporate fundamentals. Given that India has been witnessing all-round growth across different sectors, there is a high probability that Indian companies will continue to deliver strong performance as well as good returns.
The earnings season has been underwhelming till now. Do you believe this signals a prolonged slowdown in consumption, or do we expect recovery soon?
The recent slowdown has been triggered by a decline in credit growth in the economy due to regulatory intervention. It should be considered a much-needed intervention rather than a timely one in order to ensure that we, as an economy, do not encounter any unexpected negative developments while creating a strong platform for sustainable long-term growth.
Markets generally go through time value corrections whenever valuations rise substantially above long-term averages. Therefore, after witnessing a significant rise in the market, one should be prepared for a marginal downside and a flat market for some time to come.
Do you think stock valuations have corrected enough? Which sectors do you see as attractive for buying at present?
The recent market correction has notably impacted high-valuation stocks and sectors facing regulatory interventions, particularly in financials. This pullback has curbed aggressive retail and HNIs participation. Despite this, several sectors appear promising for the long term, as monsoon season concludes, we anticipate a rise in demand across cyclical sectors, notably cement, steel, and petroleum, driven by renewed construction activity and an uptick in order books. Meanwhile, as interest rates stabilise, the IT and pharma sectors are poised to benefit from increased spending and steady growth. Lastly, the banking sector, after a period of consolidation, could also present solid opportunities in the near future as valuations align with underlying economic strength.
A significant amount of mutual fund equity inflows have been going into sectoral/thematic fund schemes. Do you see this trend continuing?
Thematic funds have attracted significant inflows recently, driven by their unique appeal as satellite investments that focus on specific sectors or themes, thus offering a level of diversification distinct from traditional funds tracking the Nifty or Sensex.
However, as thematic funds tend to invest in a limited number of stocks within a single theme, they may struggle to absorb large inflows without compromising performance.
Additionally, certain sectors may lack sufficient scale for these funds to sustain substantial cash inflows, leading to size constraints that investors and fund managers must consider. While thematic funds remain a valuable long-term play, investors should be cautious about the cyclical nature of certain sectors and the potential for excessive money chasing a few stocks, which can drive up valuations.
