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Equity markets are warming to the pre-election frenzy and the trend could rise further, says Mahesh Patil, co-chief investment officer of Birla Sun Life Mutual Fund. In an interview with Sneha Padiyath, he talks about the global issues impacting markets, his election strategy and the earnings outlook for FY14 and FY15. Edited excerpts:
Is the pre-election market rally losing steam?
We have only seen some reaction before the elections. We have not seen a huge build-up happening yet because since the beginning of this year, the global sentiment has been pretty negative. In the last two months or so, we have seen some money coming in through India-dedicated funds. That has helped us fare relatively better than other emerging markets.
But we have not seen real money coming in. Some expectations are definitely there but it has not led to any meaningful action in the stock market, owing to global concerns. But any new leg-up could be pretty strong and lead to a new recovery in the market.
What, in your view, are the global concerns?
India’s dependence on oil is very high. Oil has moved up quite a bit on tensions between Russia and Ukraine. The standoff between the two could lead to some disruption in oil output, maybe another one-two million barrels. But I think this will be short-lived.
The other concern is tapering of the QE3 (US Federal Reserve bond-buying programme), which could lead to outflow of FII (foreign institutional investor) money. To a large extent, markets are still dependent on FII flows for capital.
So far, QE3 tapering has had little impact on markets. When will it have an impact?
There had been some impact. We have seen some money moving out on account of the QE3 tapering. But Indian markets have not been impacted much because relatively, we are better than other emerging markets. People are trying to look at India; they are thinking India could be on the path to a recovery.
Even if tapering happens, we should be able to weather it better. Of course, it will depend on the economic revival, supply-side issues being resolved and the rupee’s stability. We should get decent flows, even if those aren’t as much as last year.
What is your investment strategy ahead of the elections? How will you manage the volatility?
The worst is definitely over. In the past year, markets have consolidated pretty well. So, I think it is creating a foundation for the markets to look better in the next two-three years. Assuming we have unfavourable results in the elections—-a Third Front or an unstable government at the Centre —-, that could lead to some correction in the market.If one of the leading parties forms a stable government, there is hope things will revive. The whole investment cycle, battered in the last two years or so, will also revive. So, slowly and steadily, we are moving into sectors such as capital goods, infrastructure, and the domestic cyclicals.
We are quite positive on information technology (IT) and pharmaceuticals, in which we continue to be present, though we have reduced exposure. To an extent, we are also bullish on private sector banks, automobiles and automobile ancillaries. Our stock-picking will help us take care of the volatility. We are not getting into too many high-beta stocks, which are more volatile. We are focusing on companies with sound fundamentals and sound balance sheets.
What is your outlook on corporate earnings?
For FY14, the numbers are a tad better. We have seen some upgrades and I think we should end up with eight-nine per cent growth. Next year (FY15), we should see 15 per cent earnings growth, better than what we have seen in the last three years, when earnings growth was in single digits.
Some sectors such as IT and pharmaceuticals, which are riding on the rupee depreciation, will do well. Others such as telecom, which went through a bad phase last year, are slowly seeing a recovery. The automobile sector should also see some improvement. We feel margins are bottoming out. These factors should lead to better earnings growth next year.
