'As the Indian economy continues to expand over the next three years, mid- and small-caps should do well as they have higher exposure to the domestic economy than large-caps.'
Equity and bond markets have started to look beyond the near-term outlook of subdued growth and elevated inflation as the drivers affecting both growth and inflation have started to turn favourable, says Mahesh Patil, chief investment officer, Aditya Birla Sun Life Asset Management Company, in conversation with Puneet Wadhwa/Business Standard.
What is your outlook for the markets for the rest of calendar year 2023?
We expect equity markets, both globally and in India, to be in a consolidation phase in the near term.
Currently, most risks are priced in and there is little downside in the Indian equity markets.
Since valuations have normalised from their peaks, the markets should track earnings growth.
With interest rates moving up and expectations of moderate equity returns, fixed income looks attractive as well.
By and large, the risk/reward seems fairly balanced across asset classes.
For this reason, a multi-asset allocation approach with exposure to equity, fixed income, and gold remains well-suited for the current environment.
Have global equity and bond markets shrugged off fears of subdued growth, rising inflation, and a possible recession?
Global macroeconomic (macro) data points continue to pleasantly surprise, leading to an upgrade in the global growth outlook for CY23, primarily due to a mild winter in Europe and easing supply-chain pressures because of China ending the havoc of zero Covid.
The US is expected to see a soft landing with moderation in growth over the next few quarters.
However, recovery is likely afterwards as inflation moderates and the rate-cut cycle starts.
Equity and bond markets have started to look beyond the near-term outlook of subdued growth and elevated inflation as the drivers affecting both growth and inflation have started to turn favourable.
Subsequently, sentiment should further improve as inflation moderates.
How do you see India Inc respond to these headwinds over the next few quarters?
We expect India Inc to be in a wait-and-watch mode at this juncture.
On the one hand, global cyclicals have been impacted due to macro issues; on the other, domestic-focused companies have seen some moderation in demand due to elevated inflation.
While demand has been softening, commodity price deflation, along with cost control measures by corporates, has prevented severe margin contraction.
The situation should improve as global risks recede and inflation moderates over the next few quarters.
Have retail investors become risk-averse?
Given weak equity returns over the past 18 months, the euphoria amongst retail investors has started receding as evidenced by a fall in dematerialised account openings.
However, systematic investment plan (SIP) inflows continue, which indicates maturity among retail participants.
Inflows into SIPs in March reached fresh highs and breached Rs 14,000 crore.
We expect the trend in SIP flows to continue, acting as a counterbalancing force in the wake of foreign institutional investor outflows.
What are your expectations for the 2023-24 earnings of Corporate India?
Higher interest rates may lead to curtailment in demand in sectors such as consumer discretionary.
Global cyclicals will also get impacted, which may lead to some downgrades in corporate earnings.
However, they should still register healthy double-digit growth for FY24, galvanised by banking, automotive, and consumer staples.
Triggers include a continuous uptick in consumer sentiment, green shoots in rural recovery, and commodity prices coming off their previous highs.
What is your strategy for consumption-related plays?
The latest official monsoon estimate of normal rainfall by the India Meteorological Department is a positive trigger that should augur well for the rural economy and consequently, consumer staples.
However, we continue to see the consumption sector as a structurally long-term play, given the benefits of demographics and lower penetration across categories.
Any correction should be seen as a good opportunity to build position.
What are the bigger themes other than banking, financial services and insurance, infrastructure, etc that investors can latch on to at the current levels from a two-three-year horizon?
We remain constructive on the discretionary consumption sector, given the rising middle class, urbanisation trends, favourable demographics, and lower penetration across major categories.
Companies in the pharmaceutical sector also look attractive, given the high return ratios and high barriers to entry.
The specialty chemicals sector also looks appealing, taking into account the rise in a shift of supply chains and India's increasing manufacturing competitiveness.
Can the information technology pack be a contra bet?
Except for near-term concerns about growth, the IT sector can be a good contra bet.
Valuations for IT companies have returned to the 10-year average after muted results from big marquee names.
Besides generating healthy earnings yield, the medium-term growth outlook for IT companies continues to remain healthy, led by digitisation.
Is it time to aggressively build a portfolio around mid- and small-caps from a 12-24-month perspective?
Investors may start building portfolios within this space, considering the decent correction from recent peaks.
Macro headwinds in terms of inflation and interest rates should improve over the next year.
As the Indian economy continues to expand over the next three years, mid- and small-caps should do well as they have higher exposure to the domestic economy than large-caps.
We recommend building a portfolio in mid-, small-caps through the SIP route with a three- to five-year horizon.
