As a fund house, we are buying into this market correction: Mahesh Patil

Mid-and-small-cap stocks have seen a significant impact in this correction and the fall is giving a good opportunity to add good quality mid-and-small-cap stocks in our schemes, says Patil.

Most global markets traded weak on Tuesday following the sharp fall in oil prices. MAHESH PATIL, chief investment officer – equity at Aditya Birla Sun Life AMC tells Puneet Wadhwa that unless there are signs of the virus being contained and a flattening of the virus curve in India, the possibility of re-testing the recent low always remains. Edited excerpts:

Do you think we can retest the recent lows on the Sensex and the Nifty going ahead or is the worst over?

Indian equity markets had rebounded in line with the rise in global equity peers on expectation that we should soon see a flattening of the virus curve globally. Also, a fiscal stimulus package is expected to be announced soon by the Indian government. However, till we see a peak in the number of new cases, both globally and in India, markets will likely remain volatile. With the strict lockdown being extended to May 3, we can hope that community transmission of the virus may not happen across the country, but there will be an impact on corporate earnings. Unless we see some signs of the virus being contained and a flattening of the virus curve in India, the possibility of re-testing the recent low always remains. However, recent lows that we saw should hold as market valuations there were at levels seen during the Global Financial Crisis (GFC) in 2008. Also, the intensity of foreign institutional investor (FII) selling has reduced since then.

There have been reports of investors shutting down their systematic investment plans (SIPs) in the market meltdown. What has been your experience?

As per the latest data for March, domestic equity inflows have been strong at over Rs 11,000 crore and SIP flows have sustained at Rs 8,600 crore. What this tells us is that retail investors are behaving in a mature manner and have not panicked due to the recent market correction. On the contrary, they are taking advantage of the fall to build up their equity exposure gradually, which is the purpose of an SIP. After the recent sharp correction, valuation metrics are giving a clear signal that equities are in an attractive zone. From such low levels in the past, long-term investors have been rewarded handsomely. Hence, they should continue with their SIPs.

What has been your investment strategy amid the market crash?

As a fund house, we are buying into this correction. Many high quality stocks have fallen to levels where their valuations have become reasonable or attractive. Mid-and-small-cap stocks have seen a significant impact in this correction and the fall is giving a good opportunity to add good quality mid-and-small-cap stocks in our schemes. The sharp correction has provided an opportunity to rebalance our portfolio.

Do you think the retail investors have now become risk averse?

Retail investors seem to have taken cognizance of the fact that in the past, after such sharp falls markets have provided an excellent return in the next three – five years. Hence, investors are staying the course with their SIPs, which is the right thing to do. This is a good time for investors to rebalance their asset allocation. Wherever the equity component has gone down due to the fall in the market, investors should increase their equity exposure. There can be a slight tilt to large-caps at this time. While SIPs are the best way to invest, if investors have excess cash, they can deploy it over a period of the next two-three months at the minimum and can accelerate the deployment if there is any sharp correction.

How will the corporate earnings will play out in financial year 2020-21 (FY21) and beyond?

With Covid-19 expected to have a major impact in the first half of FY21 (H1FY21) and only a gradual recovery expected in H2FY21, the economy has been pushed back by a year. Hence, although consensus estimates for FY21 Nifty earnings have only been downgraded by 10 per cent to 13-15 per cent YoY, we think Nifty earnings could end up being flattish for FY21. However, with a gradual economic recovery being expected in H2FY21 and continuing into FY22, Nifty earnings should recover in FY22.

Overweight and underweight sectors?

Given this backdrop, one can be overweight private banks, insurance, pharma & healthcare, low-ticket consumer discretionary, and telecom sectors. Sectors such as non-bank finance companies (NBFCs), information technology (IT), auto, metals, and oil & gas can be underweight.

In the current scenario, we prefer sector leaders with relatively stronger balance sheets, higher earnings visibility, strong cash flows, and management with a good track record as they would be the first ones to come back with the economic recovery. On the other hand, avoid companies with high leverage. We continue to maintain a fairly liquid portfolio at this time.

How should investors tackle the consumer and financial (including banks, NBFCs) sectors? Is the worst priced in?

Consumer Staples companies are a good defensive play in the current environment where uncertainty and volatility are high. Also, with the government announcing various measures to provide financial support to the low-income segment through its stimulus package, consumer staples companies should continue to see steady demand. Hence, they may continue to see strong investor interest despite rich valuations. However, only those companies offering basic staples, especially catering to the low-income segment may do well while companies with more discretionary products can get impacted due to down trading. Overall the consumer sector may not give high returns going forward due to their high valuations, but investors can continue to hold on to them for downside protection in case of any market corrections.

Banks and NBFCs in general will be under pressure due to slower credit growth and higher non-performing assets (NPAs), especially amongst SMEs and self-employed segments, as well as due to potential job losses. Unsecured lenders and microfinance institutions (MFIs) will get impacted more. However, those with a strong liability franchise and better quality of assets will gain market share and we may see some consolidation in the Banking & Finance sector. This was an over-owned sector and has seen a sharp correction. Some of the leading banks are now available at attractive valuations and they can be bought into the correction. On the NBFCs, the better ones can bounce back but clarity will emerge only in next two - three months. So investors may not want to buy them right now but can evaluate the NBFC sector after the dust settles.

The RBI has given a three-month moratorium on term loans which should benefit corporates, SMEs, and individuals. If we see the virus peak out some time in April and a gradual return to normalcy in May and June, which is the base case being factored in by the market, then the disruption will be limited and we may not see a lot of job losses, bankruptcies and defaults as is being feared. Hence it will only be a temporary impact for the consumer and financial sectors, unless the virus containment measures extend for a longer period of time that may cause operational and cash flow challenges.