With uncertainty looming over the equity market, Mahesh Patil, head-equity, domestic assets. Birla Sun Life Mutual Fund, is a bit cautious. For now, he is overweight on large-cap stocks, holding companies that have good earning visibility and growth. In an interview with Chirag Madia and Muthukumar K, Patil said he was bullish on global cyclicals; commodities & metals and the IT sector, which are expected to do well, given improving global economic conditions. While over the short-term, he isn’t expecting any major correction, and sees the Sensex remaining range-bound, he is also keeping a close watch on the higher commodity prices. Excerpts:
How do you read the equity market at this juncture?
If we look at the earnings growth outlook for this year, there were some disappointments. But after the recent correction, fundamentally speaking, the equity market is ‘fairly’ priced. But then, there are specific challenges being faced in some sectors. While on the one hand demand has picked up in the consumption sector, there have also been some slowdown in the infrastructure space following policy issues, which in turn, has led to delay in projects.
With the unearthing of scams and bribery, the government seems to be under pressure to take action. While these events will affect the investor sentiment over the short-term, I think, on an overall basis, our growth story remains intact.
In the short-term, we don’t expect any major correction and expect to remain range-bound. We expect Nifty to not go below 5,600 levels. However, the higher commodity prices for a longer period of time is a cause of concern.
FIIs have been selling after the scam s have surfaced. Your comments?
Domestically, government needs to act swiftly on scams as no investors likes uncertainty. If the government does that and starts focusing on long-term policy decision making, I think market should be back on track.
Globally, we are not out of the woods, yet. So we will witness periods of global volatility, which could affect us locally.
Due you think sustained inflationary pressure could play spoilsport to the overall consumption story, which has remained intact till now?
No, I don’t think so, as the rural consumption story has been supported by higher food inflation, which in turn has helped farmers in the form of higher support prices. Also higher land prices, investments into gold (and its appreciation) have created a higher wealth effect among rural consumers. Even for the urban consumers, salary and wages has gone up with a 10-15% growth in salaries expected next year. However, higher inflation and a sharper rise in interest rates are the things to watch out for.
What’s your outlook on oil prices. At what level is it a concern for the equity market?
India is dependent on oil and our current account deficit could worsen if oil prices move up. Higher oil prices also tend to put pressure on the rupee, which in turn could affect portfolio returns in dollar terms for FIIs. Rupee appreciates on strong capital flows, benefitting portfolio returns. But worsening current account deficit could negate the effect through a depreciation of the rupee.
We will be cautious if oil touches $95 per barrel, but our belief is that oil wouldn’t remain that high for longer periods. While some oil analysts are betting that oil might touch $100 per barrel, we think it will probably not happen in the near term.
Currently, oil prices are also higher because of higher demand following the winter season in the northern hemisphere. So, in the near term it might touch that levels. But from the medium-term outlook, we don’t think oil will sustain at that levels, unless global demand picks up sharply. In the medium term, we expect oil prices to come down to $80 per barrel.
Could 3G licence selling and PSU disinvestment this year, to some extent, neutralise the effect of higher oil prices?
Yes, I think this year there will be no major challenges because of the bonanza the government got from selling 3G licences and through PSU disinvestment. So this year it should be pretty comfortable, not to mention the positive Q3 advance tax collections. These give a lot of money to the government to spend.
The challenge is creating a suitable policy mechanism to channelise the money back into the system. But, decision-making has been slow, which in turn has affected the liquidity in the system.
How do you look at corporate earnings for the third quarter?
We believe year-on-year growth might slow down a bit, but margins will be positive. By and large, growth numbers for the second half will be healthy; especially for global cyclicals comprising commodities and metals, and IT. However, banking sector might witness muted numbers on a year-on-year basis with NIMs (net interest margins) coming under pressure. On the whole we don’t see any major negative impact. We are expecting earnings growth for the Sensex to be around 23-25% for this year (FY11) on a YOY basis, and 19-20% for FY12.
Any comments on the recently announced RBI monetary policy?
It was well in line with market expectations and the RBI doesn’t want to give the signal that interests rates are likely to go down, with inflation running high. So they have tried to manage the liquidity by decreasing the SLR (statutory liquidity ratio) by 100 basis points and taken care of the tight liquidity situation. In the coming months, if everything falls in place, they might look at rate cuts.
Don’t you think global inflows, going forward, are likely to move to Taiwan and South Korea, affecting inflows into the Indian markets?
Structurally we don’t believe that developed economies might sustain the kind of growth numbers we are currently looking at. So FII (foreign institutional investors) investment will continue to flow into the Indian markets despite the slightly higher valuations. Interestingly, a significant part of inflows coming into India are first-time investments.
Which are the sectors you are overweight on?
Apart from the consumption theme, we are also positive in the capital goods space, though it hasn’t done well in the past. We believe that, if consumption continues at the current pace, then supplies have to catch up, which in turn should trigger capital investment. The current inflation is also supply-led and we believe by investing in companies which could benefit from the capex cycle, we would be in a position to benefit.
Mid-cap stocks have seen a sharp correction. Are you looking at these counters?
In the current environment, we are a bit cautious and are therefore focusing more on large-cap stocks. There is uncertainty in the mid-cap space and valuations are also not that attractive despite the correction.
We are slightly overweight on large-cap and are investing in companies showing good earning visibility and growth. In a scenario of higher interest rates and inflation, typically smaller companies face challenges. Going forward, we don’t see any sector disproportionally outperforming. We are currently staying invested, and the cash levels in the mutual fund industry also aren’t too high.