 "We got $1 bn inflows in week when Sensex posted biggest one-day loss: Mahesh Patil")
While the stock markets have been volatile, Mahesh Patil, Co-CIO, Birla Sun Life Asset Management Company, feels that the pain is temporary. He says that even if the markets correct from the current levels, they will rebound quickly. In an interview with Tinesh Bhasin, Patil discusses sectors investors could look at and the ones they should stay away from. Edited excerpts:
What do you make of the current market situation?
Markets are currently driven by what’s happening globally. We have seen a risk-off scenario mainly on concerns of global growth, primarily driven by China’s economic situation. The US is also withdrawing its stimulus and is expected to go for a rate hike. All these factors have led to fall in asset classes and commodity prices globally. Emerging markets have suffered the most.
Globally, investors have redeemed their money from emerging market funds. India has roughly about 8% weightage in emerging markets. Consequently, we saw continuous outflow by foreign institutional investors (FIIs) recently. One has to watch how it all pans out. The volatility is not just in India but across the world. The US, for example, has seen the biggest volatility recently. We are just following the global trend and would continue doing so in the near term.
From a domestic standpoint, we have not deteriorated materially. But things are not improving either. GDP numbers have come in below expectations. Earlier, there were expectations that we would do better than last year. But the first half of the current fiscal was not that great. The remaining months too may not see any substantial change as there is moderation in corporate earnings growth.
We cannot dissociate from what’s happening globally at present. If domestic numbers were to improve, which we expect in the second half from October-November onwards, and government spending picks ups, which has started recently, then growth can improve. Markets will then start to dissociate from global events.
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How are you proceeding with investments?
Markets have corrected significantly from its peak and valuations are now looking more reasonable, at least in the large caps stocks. We are not much worried about the market downside. Though market may further correct, it would not remain there for too long from these levels. Stock picking is slightly challenging because of the global scenario.
What sectors are you looking at?
With rupee depreciating, we are looking at defensives like pharma. The valuation in this space is not too high and growth is better. Another theme we are looking at is consumption, which include sectors such as auto. It is getting benefits of low commodity prices. Demand should pick up in the later part of the year. Next year, pay commission would provide some stimulus to the consumer sector.
We also expect government spending on roads and railways to pick up. We see the benefit percolating down to sectors and then to companies. We are studying such companies that would benefit. Once can also look at the private sector banks in this correction. We are also positive on Information Technology. However, our approach is more stock specific rather than betting on a particular sector.
How about PSU banks?
Though the government is infusing capital, the macro environment is challenging. They would possibly face more pressure over their asset quality. We would still be cautious of PSU banks.
Which sectors should investors stay away from?
Sectors linked to global commodity prices are the ones that investors can ignore for now and also companies that don’t have a pricing power. These would include metals stocks and some businesses in oil and gas.
Are you concerned about rupee depreciations?
We don’t worry much about the rupee fall and don’t see a large correction. It will fall in line with the basket of currencies, but not much.
What would your advice be to small investors who have direct exposure to the stock market?
This correction is an opportunity for investors who were waiting on the sidelines due to high valuations. India’s medium and long term story still has the potential to differentiate it from global trends. We can still see decent growth going forward. One should invest in these corrections but there will be more volatility and downside due to global factors.
When do expect things to get better?
On the domestic side we are expecting improvement in the latter part of the current calendar year. A lot of action from government has started to work. Things are changing. The government is looking to double the orders it gave last year, and is confident of it. In fact, orders have started flowing. The money is going to completion of existing projects at present.
Are you worried about mid-cap valuations?
Mid-caps have not seen the kind of correction that large-caps did. If you see the risk around, we are bit cautious on the former. But we would also want to hold on to some stocks where the growth could be higher.
Valuations in mid-cap space are still high because people have not given up hope. Most of the money in this space is domestic money. The selling that we saw recently is triggered by FIIs, who invest in large-cap stocks. But if there is a further fall, investors can start offloading mid- and small-cap companies. The entry and exit cost in a mid-cap is high. So an investor will not give it up unless he is hopelessly negative of the market, which is not the case at present.
How did you see investors reacting to the recent corrections?
When the Sensex corrected 1,624 points, people rushed to put money. Lot of people were sitting on fence due to high valuations. There is some mind-set change we have observed. Lot of money is coming through systematic investment plans. In that one week when Sensex had one of the biggest one-day losses, we saw around $1 billion inflows.
Which funds are seeing strong inflows?
Money has mainly come in large-cap funds and multi-cap schemes.