Baroda BNP Paribas CIO Sees Bright Future For Indian Markets

Baroda BNP Paribas Asset Management India is optimistic about three key investment themes: Capex, Consumption, and Capital Markets, says Sanjay Chawla, its Chief Investment Officer (CIO), in a conversation with Bizz Buzz. He believes the easing of US Federal Reserve rates and the Reserve Bank of India’s potential rate cuts could bolster equity markets and lower borrowing costs. Highlighting strong agricultural performance, Chawla sees a recovery in rural demand, driven by favorable monsoon conditions and increased Kharif prices. The firm remains bullish on sectors like transmission, consumer discretionary, and financial services, while being cautious about the IT sector. Chawla also credits the success of the Baroda BNP Paribas Large and Midcap Fund to its well-balanced allocation strategy and disciplined stock selection process

What is your view on the equity markets in the context of US Federal Reserve rate cuts and expected rate cuts by RBI?

The US fed action plays out in multiple ways for our markets. Firstly, rate easing should be favourable for global cost of capital. This has a possibility for improving ratings generally. Secondly, softer US rates translates to currency markets by way of a softness in the US dollar which augurs well for Emerging Markets (EM) flows. Relatively, India’s long pending entry into global bond indices should create a wider appetite for Indian papers lowering borrowing costs.

Once RBI is comfortable on the domestic inflation dynamics, they may eventually follow suit. This is again positive for borrowers as and when it flows into corporate borrowing costs and debt funded consumption (mortgages, vehicle loans etc). Theoretically sustained global rate cuts are likely to be positive for equity markets in general.

Are you positive on agri demand sensitive sectors in the context of the monsoon?

Monsoon on an aggregate basis has been above normal this year as also the acreage sowing has been above average. Further, there have been rise in MSP for Kharif prices in the range of 5-12 per cent. All this augurs well for agri income. Consequently, we are optimistic on the rural demand recovery which have been lagging overall consumption growth for the economy. Having said that, we are more constructive on consumer discretionary demand where we believe that multiple factors such as demand recovery, shift from unorganised to organised, increasing per capita income, and premiumisation are at play. We are more selective on staples sector where we are more constructive on foods and beauty segment where we believe that we can witness a secular demand growth trend.

What sectors is the fund house bullish on Vs less so?

We continue to be positive on the three themes – Capex, Consumption and Capital markets. In capex we are bullish on transmission and distribution power capex, which we believe is a multi-year story. We are positive on increasing consumption led by growth in per capita income and remain positive on consumer discretionary names. We see financialisaton of savings as a long term theme to invest. Besides these we are bullish on healthcare and new age companies. For the last couple of years we were underweight on IT sector. Recently we have cut our underweight position and are watching global trends before going overweight.

What is your forecast with respect to profit growth of the top Nifty 50 companies?

We had a slow start to the financial year. Earnings growth for 1Q was muted. This is being attributed to slowdown in economic activity during central elections and heat wave. We expect quarter ending September 2024 also to be slow - low single digit expansion. Part of the reason being on account of base effect. For the full year expectation is for low teens earnings growth. A lot will also depend on how demand for festive season pans out.

What is the strategy employed by the Baroda BNP Paribas’ large and midcap fund in terms of investment styles, sectoral and cash allocation that has allowed the scheme to outperform its benchmark index overall all time periods (1,3 and 4 years)?

Beside the sector and stock calls, outperformance in Baroda BNP Paribas Large and Midcap is on account of disciplined approach to allocation to large, mid and small cap. Historically a judicious well timed judicious mix across the cap curve has led to outperformance.

What is your outlook for large, mid and small cap stocks?

We believe that while large caps are more of market call, mid and small cap (SMID) space needs to have a bottom up approach. Having said that, given the current geo-political uncertainty with respect to conflicts as well as the impending US presidential elections, we expect market volatility to remain high. As is well known that SMID space being higher beta would experience higher volatility compared to the large caps. Nevertheless, from medium to long term, SMID space remains one of the most attractive investment opportunities in India. Consequently, the allocation to cap curves by investors should be dictated by their investment horizon as well as risk appetite.

What has been the secret of outperformance of the Baroda BNP Paribas multicap fund over 1 and 3 year periods?

Baroda BNP Paribas Multicap fund has outperformed the benchmark in 1- and 3-year periods. The secret lies in our process of stock selection and sector allocation. As a fund house our guiding investment principle is “BMV” which is “Business, Management and Valuation”. Further, allocation plays a very important role in our Multicap fund, we follow a 4-3-3 allocation strategy which is 40 per cent large cap, 30 per cent Mid Cap and 30 per cent small cap.

What is the strategy employed by the fund house that has allowed both the Baroda BNP Paribas large and midcap fund & the Baroda BNP Paribas multicap fund to do better than the average of its peer group on the upside but fall less than their benchmark on the downside?

Overall, our investment strategy revolves around our “BMV” approach. This defines how we pick stocks as an AMC. For “Baroda BNP Paribas Large and Midcap Fund” and “Baroda BNP Paribas Multicap Fund” there is another layer of complexity optimum mix of Large/Mid and Small cap stocks.

Off course stock selection plays a very important role in overall fund performance. We look out for companies that can grow faster than their industry peers, have strong return ratios, and are led by capable management teams. Investing in companies which seems to have ability to scale up over their lifecycle, from small-cap to mid-cap to large-cap, is a key part of our strategy. This long-term perspective on a company's growth potential sets our stock selection process apart. This may be one of the reasons why we do better compared to our peers in upside while our process of BMV gives an edge in terms of benchmark outperformance.

To what extent do you see momentum as a factor that will continue to drive markets, if this is expected to continue, how can investors ride this wave?

Momentum to an extent stems both from the gravitation of money towards equity assets and the second towards the fancied sectors. To our mind the first shift which is seen in the buoyancy in SIP flows, NPS subscriptions etc has some structural legs to it. Maybe the magnitude may see some ups and down, but it has definitely moved to a different level from say half a decade back. The second is the backing of fancied sectors. To our mind these excesses are frequent in markets and if a certain sector is not able to justify the valuations, we would see money rotating out to better avenues over a period. Take for example, BFSI (banking & financial services, insurance etc) which was at its peak 40 per cent+ weight of frontline indices and has now come off to a third weight (33 per cent) in frontline indices and we have seen an expansion in weights for sectors such as industrials, utilities etc. This is an ongoing process of dynamic adjustment of the price value equation. To our mind for an investor any product like a flexicap product or a business cycle product can help tide over such issues as the fund would itself do these adjustments and the investor can keep his/her ownership for the longer term.