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Mahesh Patil, co-chief investment officer, equities, Birla Sun Life Asset Management, believes Indian equities are still in a bull run despite the recent 10 per cent correction. He tells Chandan Kishore Kant the market will benefit from more government spending, interest rate transmission and steady rupee depreciation. Edited excerpts:
What lessons does one need to take from the latest correction?
It is a reminder of three things. One, the government has to put the foreign institutional investor (FII) tax confusion to rest, once and for all. Almost every one of the past five years, we have managed to raise the issue of taxing FIIs in one form or the other, before clarifying that we would not tax.
Two, the global markets are getting more connected. An impending decision to raise US interest rates, linking of Chinese local stock markets to global investors and the decision of Greece to pay or not pay its dues can all affect our stock markets. Three, the fundamentals have to catch up with valuations; corporate earnings have to grow to justify an up-move in stock prices.
We believe we are in a bull market in India. Such markets are prone to steep corrections. There were 13 corrections in the bull market of 2003-2008. This was the first double-digit correction since September 2013. It is not easy for an economy of our size to turn around quickly. There will be phases where some market participants might lose belief in a turnaround and exit. Those would be a good buying opportunity for others.
Corporate earnings are yet to catch up. How are you positioning your portfolio?
Cross-currency movements across the globe, inventory losses due to the fall in commodity prices and increase in non-performing assets (NPAs) in the banking sector have impacted corporate earnings. The top line was also weak due to slower pick-up. Most private sector banks have posted good results. It has been a mixed bag for the rest of the sectors.
We expect public spending from the government to be good. We also expect interest rate transmission and steady depreciation of the currency. We would prefer stocks where there is visibility of earnings.
What key risks could spook the Indian market?
Globally, a risk could come from a rate increase by the US Fed (central bank). There could be a short-term negative reaction leading to the event or after the event. Currently, the managers of emerging market funds are overweight India and underweight China. If there is an increase in weight of China local shares in the MSCI indices, it might lead to increased allocation to China. Locally, blocking of bills in the Rajya Sabha is a significant risk to the efforts the government is putting to restart the investment cycle. This could be seen as a negative. Additionally, we risk a market correction if earnings growth doesn’t come even after two quarters.
Has our market become more stock-specific or is there room for sectoral plays?
The recent correction has punished some stocks to the extent of 30-50 per cent, as they lacked in the fundamentals. It has also rewarded companies that are doing well. Hence, the market has become stock-specific. We are looking for companies with a credible business model, with sustainable competitive advantage, good balance sheets and pricing power. We have no major tilt in any particular sector but are stock-specific within sectors.
There are concerns about the rural economy. Against this backdrop which sectors would you like to avoid?
The rural economy did well from 2010-13. However, due to a combination of lower increases in the government's minimum support price, lower wage growth, reduced spending on the rural job guarantee programme, falling gold prices and inclement weather, the rural economy has come under severe strain. Agricultural gross domestic product grew only 1.1 per cent in FY15. We believe the strain on the rural economy would remain and, hence, would be cautious on two-wheelers, tractors, consumer staples, rural lending companies and state-owned banks.
You have been negative on telecom. Has the sector lost its charm, despite having a record number of subscribers?
Indian telecom has been a spectrum-constrained market. We have been negative on the sector primarily due to the significant amount of spectrum payouts for telecom operators, which will continue to keep their returns on equity depressed. Despite the record number of subscribers and strong growth of over 50 per cent yearly, the capital investments in networks that the operators have to incur will continue to be a drag on return ratios, which are not expected to touch double digits even in the next two years.
