With gold having outpaced equities over the past year, Gubbi suggests that now may be the time to rebalance—reducing gold exposure and increasing equities, provided initial allocations were aligned with long-term goals.
Edited excerpts from a chat with the fund manager:
How do you assess the current state of equity markets? The market appears to have bottomed out and are we on track for a new record high soon?It is futile to predict markets in the short run given the several inherently unpredictable variables at play. However, we can try to get a grip around these variables. From a flows perspective, it appears that the dollar index correcting sharply on the back of US 10yr bond yields pulling back is reversing flows into emerging markets, including India. EMs are also benefitting from renewed interest in China on the back of DeepSeek showing that the Chinese are closing the gap on America’s lead in AI. This has led to an abatement in FII selling, turning into inflows even providing a respite for the Indian markets. However, concerns around domestic economic and earnings slowdown remain and valuations aren’t still that attractive beyond a few pockets, which could weigh on the market rally sustaining.
Which sectors do you see as the biggest growth opportunities in the next 3–5 years, and why?The markets currently are more conducive for bottom-up stock pickers after what has been a fairly broad-based rally over the past few years which saw several themes delivering handsome returns. But what that has meant is there are very few pockets of value left from a top down perspective. Financials after the recent outperformance also seem to be trading at fair valuations. However, given the macro environment both globally and locally, some dislocation looks inevitable which will likely open valuation gaps sooner or later. Valuations aside, consumption remains a secular growth sector given the demographics, capital goods look to benefit from any China + 1 fallout from the trade wars triggering an Indian manufacturing renaissance, and so do specialty chemicals.How do you balance risk and return in your equity portfolio, especially during times of market uncertainty?The best risk management tool in markets is valuation. Margin of safety is required to take care of inevitable uncertainty. The other option, though harder, is to get earnings visibility which in turn is dependent on external factors, thereby still retaining an element of uncertainty.What lessons have you learned from past market cycles that you apply to your current investment approach?As a firm, we at Marcellus have learnt the importance of valuations even if we focus on quality businesses. Whilst quality allows room for error on the valuation front given sustainable cashflow growth in the long term, it can result in sub-optimal outcomes in the short and medium terms.
How important is asset allocation in building long-term wealth, and what’s an ideal equity allocation in a well-diversified portfolio?There is plenty of research going several decades back which shows that asset allocation drives more than 90% of investment outcomes for investors across the world, more than stock or fund selection and market timing. A well diversified asset allocation tailored for the individual’s specific goals, systematically rebalanced is proven to deliver not just a smoother ride but potentially better outcomes. The latter tends to be under-appreciated. Given asset allocation is best tailored to suit individual needs, there is no ideal equity allocation. For example, someone whose goals are largely short term should have little allocation to equities, whereas long term goals are best fulfilled by a generous allocation to equities. However, even in the latter case we wouldn’t recommend a 100% allocation, instead blend it with an asset class with low correlation with equities, say gold, such that one is able to take advantage of inevitable equity drawdowns by rebalancing across asset classes.
Gold appears to have become a consensus buy not just in India but all over the world. Are you a gold bug too?Gold has proven to add value to portfolios given its low correlation with equity. So there is always a place for gold in every portfolio. However the allocation should be based on a disciplined goal based approach rather than speculative. For example, given the outperformance of gold over equities over the past year, rebalancing now would suggest a reduction in allocation to gold and an increase in equities, provided of course the allocation a year ago was inline with one’s goals. It might be tempting to go long on gold given the prevailing uncertain environment globally, but we prefer a systematic approach to a speculative one.
What are your expectations from the Q4 earnings season? Do you believe the worst of the downgrades is behind us, and are we now entering a phase of gradual earnings recovery and growth?The one-off events of the first half of the fiscal in terms of election impact and unseasonal rains aside, earnings are still seeing downgrades. External facing sectors such as IT have seen a further delay in recovery in discretionary spending given the tariff led uncertainty in the west. Likewise, capital goods in the short run look to disappoint given little fiscal room for govt capex and external uncertainties holding back private sector capex. On balance, I would expect risks to the downside from a consensus expectations perspective even more so from a valuation perspective.
