Stick to planned allocation, no asset class merits going overboard: Shanker

Even as valuations in the small and midcap space have stretched, ASHISH SHANKER, managing director and chief executive officer of Motilal Oswal Private Wealth, has been advising clients to prefer largecap and flexicap funds for incremental investment. In an interaction with Abhishek Kumar, Shanker discusses how the wealth management firm is rebalancing client portfolios and scaling back small and midcap allocations to desired levels. Edited excerpts:

What is your take on the equity market as we enter the new financial year (2024-25)? 
 

While the economy remains on a strong footing, returns from this point onward will likely be lower. With the one-off positive surprises now behind us, returns will likely follow earnings growth, expected to be around the mid-teens this year.

Although valuations in the small and midcap space are somewhat stretched, largecap stocks are still reasonably valued.

From here, two scenarios can play out: either small and midcap stocks will correct, or largecaps will outperform the smaller stocks. The likelihood of a correction in largecaps is low.

Has the concern around small and midcap valuations led to changes in client portfolios? 
 

Exposure to small and midcap stocks had exceeded desired levels in many portfolios, prompting rebalancing. In certain cases, we’ve adjusted allocation plans to reduce small and midcap holdings marginally.

In February, we advised investors to take a staggered approach to investing in smallcaps. We also communicated the preference for largecap and flexicap funds for incremental investments.

What about exposure to various asset classes?
 

In January, we communicated that the calendar year 2024 will witness an all-round performance. There isn’t a compelling case to go overboard on any asset class. Hence, the prudent approach is to stick to the asset allocation framework.

On margins, there is a case for bullishness on debt as interest rates are expected to decrease in the latter half of the year.

We’ve advised clients to consider loading up on over 10-year government bonds directly or through mutual funds (MFs). This view is subject to any major changes in the market situation. For example, if largecaps correct by 10 per cent and small and midcaps decline by another 15-20 per cent, they will become attractive.

How do you approach fixed income allocation after the change in debt fund taxation? 
 

MFs still offer the best value from a long-term perspective, allowing for tax deferment. However, for short-term investments, bonds are gaining traction. We’ve procured a considerable amount of sovereign bonds for clients since October.

Ultra-wealthy clients are also willing to participate directly via non-convertible debentures. Additionally, there’s a lot of activity in private credit issuances.

Category II alternative investment funds and credit funds have also gained popularity among clients seeking higher yields but who are uncomfortable with equities.

Hybrid MF offerings, which are low in volatility and offer erstwhile debt taxation, have emerged as an alternative. These products have become popular among high-networth clients, especially those with a longer-term view.

MFs have also entered the US debt fund market. What is your take on that and international equities? 
 

Returns through capital appreciation and coupon payments are likely to be similar in India and the US. Hence, there isn’t any added incentive to invest in US bonds unless you have a positive view of rupee depreciation.

The liberalised remittance scheme offers an option to invest in US debt. Some structures even offer tax benefits.

Regarding equities, the US market is a viable option due to its low correlation. However, China remains a black box; despite exciting valuation levels, investing there entails major risks.