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With the new government's Budget a few weeks away, market participants' anticipation are high. However, Mahesh Patil, Co-CIO at Birla Sun Life AMC, tells Chandan Kishore Kant that road to recovery may not be without hiccups. According to him, it's difficult to find value in the market amid sharp rally and easy money making possibilities are no more there. Edited excerpts:
Can we expect major hiccups going ahead?
The out performance of the equity market over the past few months has been a combination of factors viz. reversal of the developed markets to emerging markets trade, improving domestic macro, and a strong mandate post election outcome which enables political stability. We are witnessing such a mandate from the Indian democracy after 30 years which should empower the new structure to take strong policy decisions without the constraints of coalition politics. Even pre-elections, the economic recovery was slowly underway. The election outcome only reinforces the same, possibly accelerating it further. Given that expectations are high, the road to recovery may not be without hiccups but the market would be more accommodating as it looks at the long term possibilities even if some of the stated actions from the mandate yield results.
Several fund managers had to juggle their portfolio on and post 16th May. How were your bets placed considering the election outcome event?
Even pre-elections, we were convinced that the domestic economy had bottomed out and that interest rates have peaked with a downward bias over a one year period. This view made us move our portfolio towards domestic recovery plays and rate sensitive sectors like banking and financials, capital goods and consumer discretionary. The fact that these sectors were worst affected the last 2 years with valuations below historical averages meant that they could outperform on the back of improved earnings growth and some rerating. We have also been increasing our exposure to midcap stocks as we gain confidence in the market recovery and an improving liquidity scenario. We continue to maintain this position post elections. Further, we have increased our weightage in PSU stocks as we believe the new structure may drive productivity of PSUs and look to divest stake making them more accountable to minority shareholders.
Where do you think most money making opportunities lie in current scenario?
The easy money in the market is no longer available with the sharp rally we have witnessed in the beaten down stocks over the last few months. Finding value in the market is difficult. To make money in this market one has to take a long-term view on certain sectors which can see a turnaround as the macro improves. We believe that the mid and small cap stocks still offer money making opportunity as they benefit more from the growing economy and easing of interest rates over a period of time.
Is fear of excessive redemption from equity schemes a past? Are you fully deployed or still taking a cautious call?
We have seen the redemptions in equity funds slowing down as the markets scaled new highs and continued to outperform other asset classes. Over the last five years Indians have underinvested in equity and overall equity as percentage of household savings is at an all time low. Given this reality, it is unlikely that one can see large scale redemptions. On the contrary as the confidence come backs and sentiments improve we would expect inflows in equity funds to slowly pick up over time. Given our positive view on the market and receding fears of redemptions we are generally fully invested in our funds.
What could be the three major challenges or hurdles which can upset India's stock markets' mood?
The biggest risk to our markets could come from any global risk off due to some global event considering that it is the FII money which has propelled the market and FII ownership is at historical high. Inflation is still not within the comfort zone though it is trending lower. A spike in inflation especially food given that talks of El Nino may disrupt normal monsoons are gaining credence will be a challenge for any hope of monetary easing. The budget is likely to be presented in the first week of July and if there is any fiscal cleansing by the new structure leading to higher fiscal deficit, it may dampen the market sentiment.
What should those investors do who remained on the sidelines and could not ride the recent quick run in stock markets? Can market throw some opportunities for them?
Investors who have missed the recent rally in the market should not worry about the lost opportunity but should look at what opportunity lies ahead in the market over the next 3-5 years. We are at the beginning of a new market cycle with a low base for the economy and the valuations are still hovering around the long term averages. It is still not too late for investors to participate at current levels if they have more than three year investment horizon.
Which sectors would you avoid in current circumstances?
We are positive on most sectors expect consumer staples where the slowdown in volume growth and high valuations render it less attractive. Amongst the defensives we still prefer IT and Pharma given their strong earnings visibility and decent growth. The rupee appreciation can lead to some earnings downgrade in these sectors but we are not factoring any significant appreciation of rupee form the current levels. The recent underperformance of these sectors also makes their valuations more reasonable and one can expect about 15percent absolute returns in this sector over the next one year.
