In the month of April 2021, Indian fund managers have been churning portfolios aggressively. The bias of their churn has been in favor of global plays and against domestic consumption plays. Is this the right strategy and what exactly have the fund managers been doing in Apr-21?
Betting on global plays
It is not just that fund managers have shown a preference for export stories like IT and pharma. Fund managers are now looking at stories that are not so vulnerable to the domestic consumption crunch that looks likely if the COVID 2.0 continues to intensify. So, funds are betting on stories like metals, chemicals, textiles, and such stories that are not so dependent on the India story. As urban and rural India faces the brunt of the resurgence of COVID, they really don’t want to be caught on the wrong foot.
Underplaying domestic stories
There appears to be a clear bias against stories like cement, FMCG, consumer durables, capital goods etc. The broad bet is that if GDP growth does not pick up to the extent anticipated in FY22, then the worst impact would be the pure consumption plays. Funds expect the pandemic to hit purchasing power in rural and urban areas significantly and that is one of the main reasons why they prefer the global stories. After all, global economies look less vulnerable to COVID-2.0 as compared to India.
Picking the low-hanging fruit
In a way, this strategy is a lot like taking a pick of the low-hanging fruits. Global stories are aplenty in the market today and most of them have given superb returns in the last few months. Take, for example, sectors like specialty chemicals or metals. Both are stories with great global potential. The global recovery is likely to boost the demand for metals and Chinese environment strictures are likely to open the field for chemical units in India to dominate the world stage. The US companies are also keen to have a backup to China when it comes to keeping their supply chains loaded. But is this a good strategy by mutual funds?
It could be a risky strategy
As we said earlier, this is low-hanging fruit but may not exactly be a sound strategy. Firstly, the entire metals story is predicated on Chinese demand. The US and Europe can only contribute so much of incremental demand. Secondly, Chinese policy as in the case of specialty chemicals can be extremely fluid and opportunistic. The US-China dispute is more political and less of economics and could patch up equally fast. After all, for both nations, it is about the economics of the relationship. If China decides to expand its production, the shortage story may vanish overnight. The one-story that stood fund managers over time is the domestic consumption story. That still looks the most fool-proof!