Market uncertainties will likely come to an end by mid-2019: Mahesh Patil

Our preference is towards domestic consumption. We believe India will continue to see steady economic growth with a marginal improvement in FY20, says Mahesh Patil

Much of market uncertainties will likely come to an end by mid-2019, Mahesh Patil, co-chief investment officer, Aditya Birla Sun Life AMC, tells Hamsini Karthik in an interview. Edited excerpts:
 
What would be the impact of the general election on the markets?
 
The general election scheduled this year does cloud the market outlook. However, the uncertainty will be over by H1CY19. The bulk of the policy changes have already been implemented by the government and now it is just a question of taking things forward. That should not be impacted by the outcome of the election.
 

In addition, an analysis of the market performance around past general elections shows that returns in the six-month period both before and after the elections have been mostly positive. Also, FPI flows have generally picked up after the election uncertainty is over. Clearly, while elections can lead to short-term blips, the market reverts to fundamentals shortly thereafter, and market performance will be driven mainly by the strength of the economy.

 
What changes are you making to your investment portfolio?
 
In 2019, we anticipate the macro fundamentals for India to be stable with range-bound oil prices, stable rupee, benign inflation, moderation in interest rates, and manageable twin deficits.
 
With an expected slowdown in global growth, we are underweight on global cyclicals such as metals and oil and gas. Our preference is towards domestic consumption. We believe India will continue to see steady economic growth with a marginal improvement in FY20, driven primarily by private consumption. Especially in an election year, people will have more cash in hand, which should spur the consumption of small-ticket consumer discretionary items. A temporary blip has been seen in the auto sector and accordingly, we have rationalised our holdings. But we expect a revival in FY20.

 
The tight liquidity situation has also eased off and system liquidity should be back at neutral by March 2019. Bank balance sheets are getting repaired and credit growth is expected to remain strong as banks step in for non-banking financial companies (NBFCs). In this context, we are overweight on financials, be it private banks, corporate banks or select NBFCs.
 
Which sectors are attractively valued?
 
Corporate banks had seen a significant correction due to the stress on their balance sheets. However, bad loans will see a declining trend and banks will likely gain from corporate recoveries. They are also witnessing increased pricing power due to the pressure on NBFCs and are benefiting from gains due to the decline in bond yields. This will enable corporate banks to put the past issues behind and focus on growth. They seem attractive at current valuations, which are below their long-term average.

 
PSUs in general, and the utilities sector in particular, saw a correction in 2019 due to government supply of paper in the form of the CPSE ETF. However, they give good dividend yield and steady cash flow, and can be looked at selectively.
 
What's your view on mid- and small-cap stocks?
 
After a strong 2017, we believe 2018 was a year of consolidation in the market. The large-cap Nifty index fell around 8 per cent from its peak while the mid-cap and small-cap indices fell about 20 per cent and 35 per cent, respectively. With earnings catching up, valuation multiples, which were fairly high, have corrected. The mid-cap and small-cap indices are trading at a discount to the Nifty, making their valuations attractive. Also, earnings growth in mid-cap and small-cap companies is expected to improve in FY20 as key drivers are in place and the domestic economy improves.

 
It would be prudent for investors to allocate 20 per cent of their corpus in equity to mid- and small-cap funds. Opportunities will be available across sectors, but they will be bottom-up stock-specific ideas.
 
What is the outlook for equity flows into the market?
 
Equity ownership is low in Indian households at 4.5 per cent of household assets even after demonetisation. However, financialisation has unlocked household savings, which were locked up in relatively less productive hard assets like gold and real estate. We see tremendous potential for domestic investor equity ownership to increase. We saw that in the past year, even as FIIs have been net sellers, domestic equity inflows sustained with systematic investment plans steady at Rs 7,500-8,000 crore per month and exchange-traded inflows of around Rs 2,000-2,500 crore per month. The Indian equity market offers favourable risk-reward amid improving growth, supportive macro, and reasonable valuations. Hence, we believe domestic liquidity will sustain in 2019 with SIP flows expected to remain steady. Overall, we can expect domestic equity inflows of Rs 8,000-10,000 crore per month on average.