We should be in for an extended period of bull market: Mahesh Patil

Despite the sharp market rally and rich valuations, MAHESH PATIL, chief investment officer for equity at Aditya Birla Sun Life Mutual Fund, tells Puneet Wadhwa in an interview that he does not foresee any dearth of liquidity in the markets. In this environment of increasing market breadth, he says, it’s all about bottom-up stock picking. Edited excerpts:

How do you see Indian equities perform in 2021 after a stupendous 2020?

After the Budget, our call on cyclical recovery in the economy and a broader recovery in the market is further reinforced. A pro-growth Budget, positive news on vaccines, a faster-than-expected economic recovery, continuing fiscal and monetary policy support, and high liquidity should provide a supportive backdrop for stocks. We should be in for an extended period of a bull market in equities.

Is market valuation a worry?

Although the markets are volatile and valuations seem expensive after the sharp run-up, two factors should continue to drive the markets over the medium-to-long term. First, the continuing upgrades to economic growth and earnings estimates can provide an upside. Second, in an environment of low-interest rates and high liquidity, valuation multiples can be higher than their long-term averages, thereby justifying higher equity valuations.

What has been your investment strategy since March 2020 lows?

Since the March 2020 low, there has been a quick rotation in sector leadership, as concerns over Covid and the economy have given way to increased confidence that the pandemic will be contained and an economic recovery is underway. Our investment strategy has been to stay ahead of the curve. We were initially overweight on pharma, IT, and low-ticket consumer durables. With positive news on the vaccine, we added some of the banking & financials and auto names. After the Budget, we have been evaluating cyclical names in the infrastructure and industrials space.

Can you elaborate on your stance on financials?

We like private banks and corporate banks. For private banks, asset quality outcome is expected to be significantly positive versus expectations after the Covid outbreak. Also, the structural story of an increasing market share based on high capitalisation and healthy liability franchise remain the crux for long-term outperformance. Corporate Banks, on the other hand, are seeing stability in the non-performing loans (NPL) scenario, sufficient coverage ratios, and a well-capitalised balance-sheet. Many PSU banks will need to raise capital, as the quantum allocated by the government is quite low. Although they could be looked at on a tactical basis, we would like to stay away, except for a few of the larger names. The rest of the PSU banks need growth capital and will likely remain behind in digital adoption.

What’s a realistic assumption for corporate earnings growth in FY22?

FY22 estimates had seen sharp downgrades between February-end to September. However, after September, the trajectory has stabilised, and earnings per share (EPS) estimates are being upgraded. We expect FY22 Nifty earnings growth to be in the range of 35-40 per cent due to the low base of FY21. Cyclical sectors, such as auto, BFSI, metals, cement, industrials, and infrastructure, have contributed the most to the upgrades, and should lead the earnings recovery.

Can there be a liquidity crunch in the secondary market as investors get drawn to firms in the government’s divestment list?

Considering the loose fiscal and monetary policy globally, the world, including India, is awash in liquidity at this time. Foreign institutional investor (FII) interest in emerging markets (EMs), especially India, is quite high as evidenced by the fact that India has got inflows of over $3 billion (YTD) in the calendar year 2021 (CY21) after getting inflows of $23 billion in CY20. FII flows are expected to remain strong going forward. Also, non-institutional flows in the equity markets continue to be quite high. I do not foresee any dearth of liquidity in the markets.

As a fund manager, how difficult has it become for you to pick potential winners and generate alpha?

In the past few months, we have seen the market breadth improving. The narrow rally we had seen in CY18 and CY19 has been replaced by a broad-based rally. Mid- and small-caps are outperforming large-caps. In this environment of increasing market breadth, it’s all about bottom-up stock picking. So, it becomes relatively easier for fund managers to pick potential winners and generate alpha.

How should investors go about constructing an equity portfolio now?

Investors should have a balanced asset allocation. Those who missed the bus in March 2020 should start an SIP in mutual funds and buy aggressively into any dip as any market correction is expected to be temporary and minor (i.e. 5 -10 per cent). Lump-sum investments can be spread out over the next few months. Investors can participate through either balanced advantage funds or asset allocation funds.