'Invest in growth oriented mid-caps'

'In the medium to long term, mid-caps tend to generate higher returns, albeit with increased volatility.'

With the markets hitting a fresh record high and India Inc mostly reporting a good set of numbers for the June 2021 quarter, Harshad Patil, executive vice-president and chief investment officer at Tata AIA Life, tells Puneet Wadhwa that rising spend by the government as well as emergence of private sector capex is expected to keep earnings momentum buoyant for the next few years.

After a sharp run thus far in 2021, do you expect the market rally to take a breather now?

While the possibility of a third wave of the Covid pandemic is real as seen in other geographies, we are encouraged by emerging data from where vaccination levels in the population have been high.

Current trends show a considerable reduction in levels of hospitalisation and a meaningful fall in the fatality rate, as compared to prior waves.

This lends credibility to the vaccination programme and also India's ability to withstand impact of a possible third wave on healthcare infrastructure.

The third wave will have a much less impact on the economy and markets could consolidate at the current levels.

How comfortable are you with the valuations at this stage?

The consensus earnings for the current fiscal are projected to grow by an outsized 35-40 per cent on the back of a relatively weak earnings profile in the previous year.

Even if we see a rise in the number of cases and resultant localised lockdowns, earnings growth for the next couple of years would not be significantly dented.

The rising spend by the government as well as emergence of private sector capex is expected to keep earnings momentum buoyant for the next few years.

Hence the valuations, albeit on the higher end of the range at current levels, could continue to track earnings growth for the next couple of years.

Does investing in the mid and small-cap segments hold merit at the current juncture?

Mid-cap and small-cap segments do tend to outperform and get expensive during a market rally.

However, in the medium to long term, mid-caps tend to generate higher returns, albeit with increased volatility.

It would be prudent to be stock-specific and invest in growth oriented mid-caps at the current juncture.

The mid-cap IT space still offers some value for medium-term investment.

Road ahead for flows into equities?

Flows in the equity market have been turbulent since the second wave.

With global liquidity remaining buoyant, FII buying can resume strongly even as the Indian economy re-opens up and business activity again reaches pre-pandemic levels, especially if the risk of the third wave recedes.

Domestic funds have turned buyers since April and flows are likely to remain positive given the rise in new fund offers.

Your sector preference at the current levels?

We are currently overweight on information technology and infra sectors.

The banking sector offers a strong opportunity as the risk of the third wave reduces and the economy is back on the growth path.

Remain underweight on the auto original equipment manufacturers and would like to play mainly through the ancillary space here.

Have the high commodity prices become the new normal for the markets and companies?

While the commodity prices rose on the back of supply side issues early on, the rally currently is fueled by demand as well as curbs in China.

This rise in prices may not sustain in the medium-term, as supply bottlenecks ease and commodity production starts to keep pace with the demand.

Moreover, as most large economies are in nascent stages of economic recovery post the pandemic, they may not sustain high demand in conjunction with passing high input costs.

The commodity price rise may cool off to an extent in the coming months.

The current earnings projections have more or less factored in this possibility.

Feature Presentation: Aslam Hunani/Rediff.com