While earnings are expected to remain weak this quarter, markets are going through a bottoming-out phase, says Mahesh Patil, co-CIO, Birla Sun Life Asset Management Company. In an interview with Jash Kriplani, he explains his view on the markets and valuations across different sectors. Excerpts:
What do you expect from the second quarter earnings season?
Our overall view is that Q2 earnings would be weak. We expect topline to get impacted due to the economic slowdown. The volatility in the rupee seen in the last few months is also expected to subdue the net reported earnings. However, we can see positive surprises in the metal, pharma and IT space.
What is your outlook on markets?
We are in the bottoming-out phase. While in the near term, we face challenges of slow GDP growth and high inflation, in the medium- to long-term we expect to see recovery. In the next two quarters, we expect the economy to bottom out. We are already seeing an uptick in exports.
Do you see the polarised market environment continuing?
Although the average P/E multiple is close to the long-term average, companies with earnings visibility are at a higher end of this valuation, while segments such as cyclicals with low-earning visibility are at the lower end of the valuation. If the interest rates come off, which would eventually happen, we expect cyclicals to outperform.
What are you overweight and underweight on?
We are overweight on sectors such as media, pharmaceutical, telecom, metals and IT, to a certain extent. Media companies are expected to see a growth in the subscription revenue owing to digitisation.
We are underweight on the consumer sector because of the high valuations.
Although these companies have strong pricing power, volumes have fallen by 4-5% in the last one year. But valuations have not corrected to that extent. We expect consolidation in these stocks from a valuation point of view. We are also underweight on oil & gas owing to regulatory concerns although valuations look attractive in the sector.
What fund categories have done well for you?
Large-cap funds have outperformed. However, once we see recovery in the economy, mid caps are also expected to catch up. Mid-cap funds look attractive from a long-term view. Apart from this, balance funds are also doing well. Investors are looking at this category as it has given returns similar to equity funds, but with less volatility as the allocation is 70% equity