Expectation of stability on the political front and the NDA government returning has led to many foreign investors, sitting on the sidelines, to come back and allocate more to Indian equities, said Mahesh Patil, co-chief investment officer (equities), Aditya Birla Sun Life Mutual Fund. In an interview with Prashant Mahesh, Patil said valuations of small- and mid-cap stocks are below long-term averages while valuations of large caps are slightly on the higher side.
Edited excerpts:
Why is money coming back to emerging market equities?
Since the beginning of this calendar year there has been a good rally in global markets, especially in emerging markets. There has been a trade in emerging markets that has underperformed the developing markets for almost eight years. That trend is reversing, because investors are expecting the dollar strength to peak out, as the growth is slowing down in the US. Rate hikes have moderated and there is likely to be a pause with one rate hike. In that scenario the dollar will not strengthen and the emerging market growth differential which had narrowed down is expected to widen a bit as some developed markets are slowing down. For emerging markets as an asset class, valuations had corrected on an average significantly compared to developed markets. As a result, money has started to move into emerging markets since the beginning of calendar year.
Indian markets have rallied sharply in the last couple of weeks. FIIs have also been pouring money?
The Indian markets lagged global markets due to a number of issues like tight liquidity, the NBFC crisis, promoter leverage, some slowdown in sectors like auto, etc and election uncertainty. However, over the last month post the terrorist attack and the subsequent government response, the sentiment has changed and the recent opinion polls suggest that the NDA has a good chance of coming back. There is an upward revision of 30-40 seats than what the markets had built in earlier. Expectation of stability on political side and current government coming back has led to lot of foreign investors, who were waiting on the sidelines, come back and allocate more to equities.
The Sensex outperformed the large-cap universe over the last one year with the rally being driven by few stocks like Bajaj Finance, RIL, Axis and ICICI Bank. Will this rally spread to other stocks now?
You should see the rally spread to other parts of the market as you get macro stability and confidence in the markets. Also beyond a point, there is a lot of ownership, so there is a trade and some normalisation will happen. As the broader market catches, money will move from some stocks and drive the broader market. Opportunity will be across sectors and across market capitalisation. Domestic cyclicals, like corporate banks, construction and infra which have underperformed due to sentiment, could bounce back. Consumer discretionary got impacted due to challenges on the NBFC side. A lot of consumer items are brought on credit and the confidence got impacted. The focus of the government is towards stimulating consumption than investments.
The mid- and small-cap space has been a big undperformer over the last one year. Should investors buy in this space now?
If you take a 2-3 year view, mid-cap can give higher returns than largecaps. They suffered due to the economy slowing down, there is some acceleration back in economy. Earnings growth is fairly good. Small- and mid-caps are below long-term averages in valuations; while valuations in large-caps is slightly on the higher side. So valuations and earnings growth could drive returns in mid-caps. The riskreward is favourable and investors should make allocation to that space.
A lot of PSU stocks are trading at all-time low valuations. Is it a good space to look at now?
Over the last few years, there have not been meaningful reforms on PSU, and the government has utilised it to meet their disinvestment objectives which has put off a lot of investors. There was a huge supply of paper and there was a huge derating without any change in their outlook. At the current valuations they are very attractive and also offer a good dividend yield. Post this financial year, we expect the supply of paper will also ebb. The underlying value in these companies is much higher. They provide good stability and dividend yield, making them a good value play. Many companies have good cash flows and balance sheets. They may not be wealth creators, but can give reasonable returns. We have added some PSUs to our portfolios in the utilities space, as valuations of many of them are at a 10-year low.
The pricing pressure in US generic space is normalising back as there is some consolidation happening on the supply side. Overall strong growth in US side generics space will not be big. Action will be stock specific. Domestic pharma is growing steadily and is on growth track. IT is steady, the growth outlook has become marginally better, the dollar revenue growth is good and global spends have not come down. Indian companies were behind the curve on digital space, but have caught up. Margin pressures are a challenge as President Trump talks tough. Hence there is no scope for multiple rerating there. Companies are doing buybacks which will provide stability in price.
Edited excerpts:
Why is money coming back to emerging market equities?
Since the beginning of this calendar year there has been a good rally in global markets, especially in emerging markets. There has been a trade in emerging markets that has underperformed the developing markets for almost eight years. That trend is reversing, because investors are expecting the dollar strength to peak out, as the growth is slowing down in the US. Rate hikes have moderated and there is likely to be a pause with one rate hike. In that scenario the dollar will not strengthen and the emerging market growth differential which had narrowed down is expected to widen a bit as some developed markets are slowing down. For emerging markets as an asset class, valuations had corrected on an average significantly compared to developed markets. As a result, money has started to move into emerging markets since the beginning of calendar year.
Indian markets have rallied sharply in the last couple of weeks. FIIs have also been pouring money?
The Indian markets lagged global markets due to a number of issues like tight liquidity, the NBFC crisis, promoter leverage, some slowdown in sectors like auto, etc and election uncertainty. However, over the last month post the terrorist attack and the subsequent government response, the sentiment has changed and the recent opinion polls suggest that the NDA has a good chance of coming back. There is an upward revision of 30-40 seats than what the markets had built in earlier. Expectation of stability on political side and current government coming back has led to lot of foreign investors, who were waiting on the sidelines, come back and allocate more to equities.
The Sensex outperformed the large-cap universe over the last one year with the rally being driven by few stocks like Bajaj Finance, RIL, Axis and ICICI Bank. Will this rally spread to other stocks now?
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The mid- and small-cap space has been a big undperformer over the last one year. Should investors buy in this space now?
If you take a 2-3 year view, mid-cap can give higher returns than largecaps. They suffered due to the economy slowing down, there is some acceleration back in economy. Earnings growth is fairly good. Small- and mid-caps are below long-term averages in valuations; while valuations in large-caps is slightly on the higher side. So valuations and earnings growth could drive returns in mid-caps. The riskreward is favourable and investors should make allocation to that space.
A lot of PSU stocks are trading at all-time low valuations. Is it a good space to look at now?
Over the last few years, there have not been meaningful reforms on PSU, and the government has utilised it to meet their disinvestment objectives which has put off a lot of investors. There was a huge supply of paper and there was a huge derating without any change in their outlook. At the current valuations they are very attractive and also offer a good dividend yield. Post this financial year, we expect the supply of paper will also ebb. The underlying value in these companies is much higher. They provide good stability and dividend yield, making them a good value play. Many companies have good cash flows and balance sheets. They may not be wealth creators, but can give reasonable returns. We have added some PSUs to our portfolios in the utilities space, as valuations of many of them are at a 10-year low.
Among defensives, we have seen a run-up in IT stocks, while pharma continues to underperform...
The pricing pressure in US generic space is normalising back as there is some consolidation happening on the supply side. Overall strong growth in US side generics space will not be big. Action will be stock specific. Domestic pharma is growing steadily and is on growth track. IT is steady, the growth outlook has become marginally better, the dollar revenue growth is good and global spends have not come down. Indian companies were behind the curve on digital space, but have caught up. Margin pressures are a challenge as President Trump talks tough. Hence there is no scope for multiple rerating there. Companies are doing buybacks which will provide stability in price.
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