Mutual fund NAVs will come to lifetime highs faster than Nifty: Sunil Subramaniam

It takes years for the market to reclaim previous highs. This is what we saw in 2000, in 2008. Are we likely to see the same post the 2020 selloff? May it take two, three years for the market to go back to those levels?
From an overall market perspective, that might be true. Because the market is a conglomerate of sectors. Some of the sectors, which were present when the market was at its high, are going to collapse. For example, oil and commodities stocks, broadly. If oil was trading at $75-80 sometime back, it is going to go to an ultimate reset at $30, and those companies are clearly going to be in a soup. From an index perspective, that maybe true. Because those will then stop or fall out of the index and new things will have to come in. People read market as the indices, and that is why this thing comes true. But if you look at our mutual fund portfolio which has the flexibility of shifting, the NAVs will not take that much time to reach their lifetime highs, because the fund manager has the ability to keep buying when there is fear and panic, keep shifting the portfolio based on what the near term is going to be and not get affected.

Do you worry about the positioning in financials? As much as 35-40% of the total benchmark for most of the funds are owning financials, that is where the underperformance has kicked in? With the exception of insurance, the remaining financials are a leveraged play, which means if the economy does well, they will do well, and if the economy does not do well, they will start tanking. If banks and NBFCs start underperforming, that may force a lot of people either to change their allocation or live with the pain?
I agree that it is not just the economic downturn. What is affecting banks is that in this economic downturn, there is going to be a widespread NPA issue. In a normal economic downturn, there is a slowdown. So you expect restructuring and all that to happen. But right now because of the lockdown, because there are so many businesses, cash-based businesses are out of business. They are going to cause a spike in NPAs and markets are discounting that. Still they do not have a clue as to what is the level of NPAs that are going to come out because of this lockdown. In the short term, financials are a kind of less safe play. I would not yet move them to risky play; but less safe play. But for very reason that they are highly leveraged play, the discounting has happened. Among leverage play, when the phoenix rises from the ashes, when the economy recovers back to normal, these will show outsized gains. Precisely because they are leveraged play, so they will see deep short-term pain, but it would be a massive long-term gain. It is your call whether you want to stay through that pain to enjoy the gain or be very tactically so-called smart and sell off during this pain and say hey, I will go back and pick it up when I see the gain happening. So that is a function of different portfolio managers’ views and what funds they have, whether they have that.

You also talked about lifetime highs. One of the problems is that, with the financials being such a large part of the index, no matter how much ever correction happens in financial stocks, they are going to remain a part of the index; they are not going to go away, they are not going to completely disappear from the index. So index weightage of 35% may come down to 25%, because of this correction over time. But because they are such a significant part, they will will have to come back and that is where a portfolio manager’s challenge will be. Because you are measured against the benchmark. Even if I have a bearish view on financials, the point is, they are in the benchmark. So I would look foolish if suddenly the benchmark rises and I am not holding it.

I can be overweight or underweight on the benchmark, but I cannot go to zero. I cannot completely exit something which is a significant part of the benchmark. That is why while financials may look bad, but you are still seeing a significant amount of investments staying invested. They would have gone to underweight in most portfolios, people would not be adding financials. But they will probably do a flight to safety there. They will get rid of the marginal financials with greater exposure to micro, retail etc. where the pain is going to be more, and go into the safer, bigger names. And they may not add incrementally to their positions.