Don't chase market momentum, says Sundaram AMC MD

Synopsis Two years ago, seasoned asset manager Anand Radhakrishnan moved from a long, successful stint as Chief Investment Officer (CIO) at Franklin Templeton India to take over as Managing Director (MD) at Sundaram Asset Management Company. In this conversation with Sanket Dhanorkar, he shares his views on the market correction, shift in interest rate cycle, valuations and money flows, and more. Listen to this article in summarized format Listen Do you reckon the market correction is on its last legs? Even though the market peaked in September 2024, the earnings for the broader market did not peak. Typically, markets and earnings cycles go hand-in-hand. Market cycles usually lead the earnings cycle. When the corporate earnings cycle is going to come down, the market will also begin to fall six months before. Very strangely, the domestic earnings cycle has remained fairly strong this time, even as markets have declined, leading to a meaningful correction in valuations. Large-cap valuations have fallen below pre-Covid levels, indicating that much of the earlier froth has dissipated. This sets the stage for a reasonable period ahead, provided companies continue to deliver double-digit earnings growth. For now, earnings momentum seems to be continuing. A small worry is the impact of elevated oil prices and rising global interest rates on future growth. Even if rates remain higher for longer, it may not drag down growth much. Therefore, I feel the market is now available at very moderate valuations. What do you make of the nature of money flows? It is important that money flows—global and local—need to readjust. Global flows are still flowing towards the artificial intelligence (AI) trade. And India is not on the positive side of the AI trade. We need to look at when the current AI trade is going to peak. Domestic flows have been largely concentrated in mid- and small caps. We saw record inflows into mid- and small-cap funds. Large-cap fund flows are very marginal. That is leading to lack of strength in large caps. It has almost distorted the entire picture. What makes an investment safer? Valuation is the primary factor of safety. When you buy something cheap, you are safe. When you buy something expensive, you are unsafe. Flows and momentum do not provide safety. Once that becomes clear, the domestic flows will reorient and market will slowly rotate. Sundaram MF is known for its capabilities in the mid/small cap space. How are you navigating this segment amid big inflows? Our market share of flows is very low. So, while I am generally conscious on excessive flows into these segments, I am not worried about our funds getting those flows because our assets under management (AUM) are relatively very small. We do monitor whether monthly flows are crossing a particular threshold level. If they are less than 2% of the fund AUM, I am not too worried. In fact, that is an internal policy on how much flows we have to maintain. So, because of our relatively small size, it’s not a company-specific problem. But it may bring a wider set of problems (distorted valuations, capacity constraints). How will the global interest rate reversal impact Indian markets? Global interest rates are at multi-decade highs—two-decade highs in the US and Europe, and a three-decade high in Japan. Fortunately, in India, interest rates and yields are around their 10-year averages, unlike in the US, where longer-term bond yields are significantly dislocated. As long as Indian interest rates remain broadly within their historical 10-year average, we should not face a significant problem. You Might Also Like: Good time to increase equity allocation; risk-reward is favourable: Vetri Subramaniam, MD & CEO, UTI AMC The sources of inflation in India and the Western world are different. Indian inflation is largely driven by food and energy, while Western inflation is predominantly driven by services and wages. Labour markets in the West are tightening as countries try to relocate jobs back to their domestic markets. Wages are unlikely to decline, which is why US inflation remains sticky. Inflation in the US goes beyond commodity prices, and this is unlikely to change unless policies of localisation and deglobalisation are reversed. If inflation remains sticky, interest rates will remain elevated. The US government is still borrowing a lot of money, running a high fiscal deficit. Traditionally, this was funded by capital inflows. Now, there is a bit of resistance to buy government bonds. That is the reason for the spike in bond yields. The term yields which people are expecting from the US has gone up. And that is a very different problem. As long as the Indian inflation remains cyclical and not structural, I don’t think the spillover effects of the global higher interest rates will be high. But having said that, an allocation change can happen. Higher interest rates will also lead to higher discounting rates, and therefore, lower valuations. And they will have a second order effect on Indian markets. What are the themes you are finding compelling now? We have been positive on manufacturing sectors coming back to growth. After a decadal period of slow growth, many of the Indian companies are now getting strong orders. Today they are at an all-time high, in terms of order book. A catch-up trade in manufacturing is happening. There is a window of opportunity for Indian manufacturing to come and establish its relative competitiveness. The second trade is on the tech space. Traditionally, tech in India is software services, which is on the receiving end of AI. They will be disrupted by AI first, before the opportunities of AI creates business streams for them. However, I believe this transition will eventually happen, with positive order flows from corporates as they adopt AI on a wider scale. But non-traditional, new age tech businesses, including fintech and quick commerce, offer innovative business models that are gradually scaling up. There is a strong pipeline of ideas in this space. In the consumption space, we have seen an upward shift from buying value-for-money to premium goods and services. Wherever premiumisation is gaining traction, with consumers willing to move up the value chain, particularly in segments like fashion and jewellery, we believe companies can deliver relatively stronger growth. ALSO READ | “You can either remain rational or outperform”: DSP CIO Anish Tawakley explains his contrarian approach to stocks, bonds and market irrationality Fourth is the financial services space. Traditional lenders have gone through a tough period. We feel that non-lending financial services, like asset management companies, capital markets and wealth management, will continue to grow reasonably well. There could also be a cyclical shift towards lending institutions over the next year, with PSU banks, private banks and NBFCs potentially making a comeback as their valuations have normalised. In moving from Franklin Templeton MF to Sundaram MF, what changes in investing philosophy and framework have you sought to bring in? Sundaram Asset Management has been a capable fund manager for more than 30 years, and has participated in various innovations in the market. A challenge they had was of the consistency of performance over cycles. In some cycles, the funds did very well, and in others, they didn’t do very well. So, one of my earliest goals was to improve the consistency and we worked hard towards it. We have strengthened the team by adding more analysts and fund managers. We have also revamped certain processes, including how stocks are selected and how long they are held. We have made meaningful changes to the breadth and depth of stock coverage, how investment ideas are reflected in portfolios, and the pipeline of our best ideas, while improving the rigour behind the entire process. Ultimately, it is all about how rigorously you pivot to the fundamentals, and how q