Daily Voice: Banks continue to be a preference within financial sector, says HDFC AMC's fund manager

Is the commodities space looking attractive enough to start focusing on?

At the broad basket level, it appears that the underinvestment on the supply side in many commodities is broadly balanced by a weaker near-term global growth outlook. However, the view on individual commodities can vary significantly. In our view, the outlook for Gold remains favourable. Despite weaker correlations with real rates in recent years, it remains an appealing asset and a potential fall in real rates could support gold prices. Further, the continuing uncertainty around global geopolitics, risk aversion amongst investors, and fear around reducing the clout of the dollar could provide a further boost to the same.

Do you see margin pressure in banks due to likely interest rate cuts in the next few quarters?

It is true that a cut in interest rates would likely bring down lending yields faster than the deposit re-pricing, driving down margins. However, we believe that the impact on overall profitability may not be as pronounced partly being offset by improving credit growth outlook (particularly on the corporate side), continuing benign asset quality cycle, potential treasury gains on the investment book if rates were to fall and possible improvement in low-cost deposit share. As such, we believe the current valuations adequately compensate for the same, which could make risk-reward in the segment better.

Are you bullish on the financial space (excluding banks)?

While banks, at present, continue to be a preference within the financial sector, we do find pockets of attractive investment opportunities elsewhere in the financial space too. In our view segments such as insurance and select lending financiers appear bullish.

Are you overweight in the IT space now?

We find risk-reward evenly balanced in this space given the recent sharp run-up in stock prices. The growth outlook remains muddled by continuing concerns around US hard/soft landing along with weak discretionary spends. However, it is a space that needs close monitoring and could provide interesting recovery plays if there is a sharp fall owing to global concerns.

Are you worried about market valuations?

We do find market valuations at the current juncture elevated with most segments (notably midcap and smallcap) and most sectors trading at a meaningful premium to their long-period average multiples. While corporate fundamentals remain strong, the appetite for the market to digest negative news flows may be limited and this makes us a bit cautious about taking aggressive bets.

Which are the sectors that have to be included in the portfolio now, and why?

In our view, there is value in sectors such as Financials and select pockets within Infrastructure, Logistics, Housing, Consumer Discretionary, and Healthcare. There are multiple interesting opportunities outside of these too, though we would wait for suitable entry valuations.

Can you tell us your strategy for managing HDFC Multi-Asset Fund?

Our key objective in managing the HDFC Multi-Asset Fund is to generate better risk-adjusted returns for investors with a keen eye aiming at reducing volatility and portfolio drawdowns. Towards that end, we run an asset allocation model across asset classes which is philosophically counter-cyclical. The choice of exposure to each asset class is determined primarily by its valuation attractiveness. In addition, we also evaluate other aspects such as macroeconomic outlook, sentiments, and liquidity to further aid in our assessment. We follow a bottom-up fundamental approach for equities and debt portfolio construction.

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