Even in the bullish markets we have seen correction in excess of 10%, so by no way we can say that this correction is over, and we can’t rule out further downside, says Mahesh Patil, co-chief investment officer at Aditya Birla Sun Life Asset Management Company (AMC). In an interview with Chirag Madia, he also indicates that there are challenges in the public sector banks (PSBs) and with recent crises in one of the PSBs, one will invest with some cautiousness. Excerpts:
What is your outlook on the Indian equity markets?
If we remove some companies like SBI and Tata Motors, Nifty earnings growth for the third quarter has seen good double digit growth. Almost two-thirds of the companies reported either inline or better growth, so that shows clear improvement. Now even gross domestic product (GDP) growth has started picking-up after the initial impact of reforms like demonetisation and GST. Markets may have run ahead of fundamental in CY17 because of the huge liquidity but now there are some headwinds which have come in because of global factors. Also, the introduction of long term capital gains tax (LTCG) in the recent Budget is leading to some adjustments in the expected returns on equity markets. The sharp rise in US bond yields has led to increased volatility in global markets and are in a correction phase. But even that correction would be short-lived as global growth and outlook is also looking strong. Some adjustments need to happen if the interest rates go up, but it would not be real worry for investors who are investing from medium to long term perspective. With strong recovery expected in domestic earnings going forward (we are expecting 20% growth in Nifty earnings in FY19), markets should do well after the correction phase is over.
So what is your strategy in regard to PSBs. After the recent crises are you looking to invest in these stocks?
I would like to say that, real reforms in PSU banks regards to governance are still away. What we have seen is infusion of liquidity by way of recapitalisation. There are challenges in the PSU banks and with recent crises in one of the PSU banks, one will invest with some cautiousness. Bond yields have also gone up sharply and PSU banks will have to deal with bond losses on one side coupled with the higher provisions for NPAs. As the bank capitalisation happens, if fund raising happens significantly below book value it will dilute minority shareholders share. While the PSU bank stocks have corrected and valuations are looking cheap, we are not very positive except for couple of large PSU banks.
There has been corrections in the markets, are you comfortable with the current valuations or is there any room for further corrections?
We have seen market correction of around 6% which is not very large correction. Even in the bullish markets we have seen correction in excess of 10%, so by no way we can say that this correction is over, we can’t rule out further downside. Factors can be domestic as well as from global markets. But with stronger domestic outlook, I think with every correction, valuations will start looking attractive and market would find support. Even as the markets have seen moderate correction we have seen decent correction in individual stock specially mid and small cap. So some of the stocks have started looking attractive with reasonable valuations and a good opportunity to add.
What are the key risks in markets?
Few weeks ago rising oil prices was one of the risks which could have impacted Indian markets, but now increased supply from US has started which has eased oil prices. Current account deficit has started going up and if that trend continues then there might be some risks. Next year India will go to polls, and if there is any change in the political outlook, it can have some short-term impact on markets. US bond prices going up and sharper rates cut are expected which might lead to some adjustments of asset allocation.
What is your investment strategy at this point of time? Which are the sectors you are bullish and bearish on in current scenario?
Strategy remains to buy on dips, focus on companies where there is strong earning visibility and not chasing stocks where the fundamentals are weak. Broadly speaking we are not bearish or negative on any particular sector at this point of time. Currently we are liking, banking (private and corporate banks), NBFCs, auto and consumer durables. We are also bullish on rural theme which will play out very well over the next few years. Even metal and pockets of infrastructure looks good. We were negative on pharma but with the recent correction in that sector we are looking at specific stocks.
Mutual funds have seen sharp equity flows in the past few years. Has your investment strategy changed due to the continuous flows of money?
As fund size grows, managing liquidity in the funds becomes important to take care of large redemptions or market volatility. So we have maintained good diversification across the funds, which has led to new stocks being added in the portfolio. Liquidity in many stocks, especially midcap and small caps, is not high and stock concentration risk can be managed through appropriate diversification in the portfolio. As inflows continue, we are not in a hurry to deploy but await the right price and market pull backs to invest.