The cost-benefit analysis does not enthuse us to hedge: Ashish Gupta of Axis Mutual Fund

Hedging involves keeping high cash in the portfolio or buying put options. But it costs money and is useful only when you have an adverse outcome. The cost-benefit analysis does not enthuse us to hedge.

What is the market estimating in terms of election outcome?

What one is hearing is 300-odd seats for the BJP and about 360-370 with alliances. The high expectations we saw at the start of the election season were moderated after the first round of voting, but thereafter the markets surged, signaling a move up in expectations. That's why we don't really want to position for an event or an outcome.

How is your portfolio positioned now?

We have 10 fund managers managing 23 equity and hybrid products. Each fund is differently positioned based on its mandate. In our hybrid strategies, we've reduced equity allocation by 500 to 700 basis points over the past two months.

What are the current equity allocations in your hybrid strategies?

In the dynamic allocation fund, the equity allocation is 60-63 percent today, compared to 73 percent a few months ago. In our equity saver fund, equity allocation is lower, around 38 percent.

Would you consider this as an aggressive or conservative approach?

It is not conservative, but we can still go much lower as well.  Today, we may be more aggressive still, but not as aggressive as we were six months ago.

What sectors are you overweight and underweight on?

We are underweight in IT services, FMCG and global cyclicals. We are neutral to overweight in financials, and mostly overweight in power. We are overweight in autos, consumer discretionary, manufacturing, industrials and mostly domestic cyclicals.

What about cement?

We are underweight. The sector has seen a lot of capital investment and new capacities coming on stream, which may outstrip demand in the next couple of years. Recent months have shown weak demand, leading to pricing pressure.

Any particular segment in power that you are bullish on?

We are overweight in utilities, equipment manufacturers and product manufacturers in the power sector. The sector benefits from both decarbonisation investments and a favourable domestic cycle with rising power demand. We are cautious about merchant power due to high current prices. We don't have significant investments in solar energy within our investment universe.

Why are you neutral on financials and banks?

Financials have seen strong profitability, but incremental improvement looks challenging. While valuations are attractive, margins will likely come down, and regulatory risks are increasing.

Is the Reserve Bank of India’s aggression impacting investor sentiments around financials?

Central bank actions are not unjustified as they were undertaken due to deficiencies by certain entities. It is important for all these firms to move up and meet the central bank's expectations, and they will need to spend more to keep up with technological advancement requirements. Larger banks are better equipped to handle these costs, so we prefer them over smaller banks.

Do you favour private or public sector banks?

We have increased our exposure to public sector banks due to their clean balance sheets and competitive or higher ROEs (returns on equity) compared to private sector banks. The focus is now on deposit growth, and some public sector banks have maintained their market share in deposits, despite losing ground on the credit side.

In recent years, private banks have grown their credit faster than their deposits. If public sector banks have maintained their deposit market share, their loan growth could match or exceed that of private banks. Therefore, we need to shift our focus from the asset side to the liability side of the balance sheet to assess their growth potential.

Where do you see the big dividend payout by the RBI being used?

It’s a good problem to have. The RBI dividend is a form of capital receipt that can help move towards fiscal consolidation without reducing capital expenditure.

I have argued in an earlier Moneycontrol column that increased capital receipts could support higher capital expenditure. Thus far, despite increased capex, there has been no corresponding increase in non-debt capital receipts. The government should leverage market buoyancy to increase capital receipts, as many PSUs are no longer undervalued.

Also read: India growth story will extend into 2024: Axis Mutual Fund report

Why have they not done this yet?

The valuations were depressed earlier; multiples of many companies were very low. Now the time is ripe.

Do you expect increased foreign flows post-elections?

If election outcomes align with market expectations, there might be a positive flow. Long-term sustained flows will depend more on subsequent government announcements and global interest rates.

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