In a market environment characterised by elevated valuations and global uncertainties, a diversified investment approach takes centre stage. While optimism prevails in certain sectors and the broader markets, it’s essential to remain vigilant about the potential impact of global risks on India’s investment landscape. This calls for a balanced allocation strategy. In an interview with Teena Jain Kaushal of Business Today a 40:40:20 framework is recommended by Rahul Singh, Chief Investment Officer, Equities, Tata Mutual Fund. The strategy comprises of 40 per cent in hybrid funds, 40 per cent in diversified equity funds and the remaining 20 per cent targets specific sectors. He also shares his outlook on the stock markets and the themes and strategies which are likely to play out in future. Edited Excerpts:

What is your view on the stock market, currently? 

Rahul Singh: I think the stock markets reflect the economy and the way the economy is now doing well; it was investment part of the economy which was earlier lagging. And that has now started performing, whether you look at the government capex, private capex or even the real estate sector. And I think that is something which is getting reflected in the markets and the buoyancy in the markets.  

We are seeing that the profit forecasts, which we had for this year and the next year are sustaining despite certain ups and downs. Certain sectors not doing well, but the other sectors making up for it. So, all in all, there is a lot of resiliencies to the economic growth as well as the profit growth forecast for the next 18 to 24 months. There are obviously risks in terms of crude prices and geopolitical risks. But at least as far as the internal fundamentals are concerned and the way India is positioned it is quite a constructive view which we have on equities. And, we must watch the valuations, but from a fundamental perspective, the view is reasonably constructive.  

What is a big call in the market currently?  

Rahul Singh: As I mentioned, the biggest change which has happened in the market or in the economy is towards the investment cycle revival and remember that investment part of the GDP is almost 30 per cent. So once that starts delivering, the overall GDP growth gets lifted and ultimately that’s good for consumption. So, I think the biggest call is that the economy is in a virtuous cycle where investment cycles will lead to more growth, more growth will lead to more tax revenues, and therefore more ability for the government to invest in infrastructure and therefore promote more and more Capex cycle by the industry. And it’s a virtuous cycle. So, I think that that’s the big call if you really ask me, and obviously a lot of sectors benefit from that, and the rest is all kind of flows from that. 

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There is a lot of hype around mid and small cap stocks right now. What are your views on it?   

Rahul Singh:  Mid- and small-caps obviously given that these sectors which are doing well today are very different from the sectors which did well over 2010 to 2021. It means that there are more opportunities which are emerging in the small and mid-caps from a fundamental perspective. 

If you look at the valuation for small and mid-caps, they have gone up for sure in the last three to six months, but they are nowhere near what we would call a very overheated zone or a bubble zone. We must be careful at these valuations that we don’t invest in weaker businesses or businesses with short term upsides only, but if you look at from a historical perspective, the valuations are not cheap, but I won’t call them as completely overheated or a bubble. So therefore, it’s a stock specific market, whether it’s large cap, mid cap, or small cap. I think in the near term, large caps probably might be looking slightly more reasonably priced than mid and small caps, but within mid and small caps also the bottom of opportunities or the stock specific opportunities is what we are focusing on instead of looking at it from a large cap versus mid cap versus small cap. I think the focus for us has been more on the stock specific bottom up investing.  

What will you advise if one asks where to invest currently? What is the best asset allocation at this point of time?  

Rahul Singh:  Well, I think given that the valuations are not cheap, definitely, I would advise a more spread out investment portfolio, in the sense that while I remain bullish on certain part of the economy and therefore the broader markets, one should also recognize that the valuations being where they are, there are global risks which can derail the story, which can derail the India investment output. And therefore, my approach today is more of a 40:40:20 approach, which means 40 percent in the hybrid funds, mainly the balanced advantage fund, which can protect the investment volatility, as well as give them an opportunity to take advantage of any correction if it happens because of the global risks. The next 40 percent can be composed of diversified equity funds, most prominently there would be a large and mid-cap, multi cap or even value funds because, we think that with the interest rates remaining higher for longer, value as a theme will remain relevant. And the last segment, which is the 20 percent should be for various funds where the sectors we like, whether it is banking, infrastructure, or the small cap segment, manufacturing revival. I think those are the two, three, I would say, thematic funds, I think getting it that we would like investors to be prepared. 

What are some of the key risks which you are seeing right now? 

Rahul Singh: I think the key risk is clearly the geopolitical situation, which is there currently in the Middle East, and whether that gets controlled or if it does not get controlled and spreads beyond the current geography, I don’t see them. What does it do to the crude prices? Because India remains completely vulnerable to what happens to the crude prices in terms of both its fiscal deficit, current account deficit, input prices, inflation, the profit growth. I mentioned about 15-16 percent profit growth for the Nifty 50 earnings that could come under risk. So, a lot of issues can go wrong. And that’s the biggest risk I would see from an Indian equity market perspective at the current moment. 

The mood has turned cautious because of the pressure on the net interest margin from higher deposit rates. So, how do you look at the banking sector currently?  

Rahul Singh: You’re right. There is going to be pressure but remember that growth has picked up. And today, an average bank is going at a rate of 15- 20%. A below average bank is also going through their book at 10- 12%. Clearly that is being offset. Any NIM pressure will get partially offset by the growth and the operating leverage, which they are. We don’t also see too much stress building up barring the extreme low ticket size lending which is happening on the unsecured side.  

We don’t see any stress building on the NPA side. And lastly, I think if you look at some of the banking sector or the large cap banks, they are still trading either at the 10-year average or below 10-year average. If I compare it with other sectors, I still see valuations being reasonable. There is obviously over ownership in this sector. So, it might take more time to perform. But if you take a 2–3-year view from here, this is one sector which can give you excellent compounding returns from the current weightage. 

What is your view on IT funds? Should one invest in IT funds because they are available at good valuation? 

Rahul Singh: It’s a stable sector. I think there are still some question marks, some distance to be covered before we can really, call a bottom in terms of, the fundamentals. Our own sense is that there is still a lot of flux in terms of decision making and postponements of the exit. So even though the companies are getting new orders, the older orders are not getting executed or getting cancelled. So, there is a little bit of a flux, where the sector is currently, which could continue for another six months if interest rates remain high and U.S. growth compound further, that flux could continue for another 12 months, maybe. Therefore, we are waiting on the sidelines. We are generally underweight in the sector. I think it’s a stable sector from a three-year perspective. At the current valuation, I think large caps are looking slightly more attractive than mid cap. So, all in all, we need to get into this sector slightly more gradually and not very aggressively.