‘GOLDILOCKS’ macroeconomic backdrop (strong growth and low rates) for Equities is driving risk-on sentiment globally which should benefit Emerging Markets, including India, Mahesh Patil said in an interview with Moneycontrol’s Kshitij Anand.
Patil, who is CIO – Equity at Aditya Birla Sun Life AMC, has nearly 3 decades of experience in capital markets. He manages about Rs 93,000 crores worth equity assets.
In the current environment, it would be best to take a 3-year view as the economy and earnings would have normalized by then. From current levels, we can expect a 10-12 percent CAGR return for the Nifty, he said.
Edited excerpts:
Q) The year 2020 saw COVID turbulence but 2021 could see a transition at multiple levels kickstarting new cycle 2021? What are your views?
A) 2020 saw COVID-induced turbulence in which global and Indian Equity markets crashed by 35-40% but then recovered to all-time highs.
Central banks expanded their balance sheets and interest rates declined sharply leading to a wave of liquidity globally. 2021 should see a transition at multiple levels leading us to a cusp of a new cycle.
First, from virus to vaccine as multiple COVID vaccines are in the pipeline and expected to be widely available in 2021.
Second, from lockdown to reopening with several high-frequency data points indicating that the global economy is back to pre-COVID levels.
Third, from recession to recovery as upgrades to economic growth estimates are seen supported by continuing monetary and fiscal stimulus.
Fourth, from a narrow rally to the broad-based rotation with investors moving from Developed Markets to Emerging Markets, Largecap to Mid-and-Smallcap, and Defensives to Cyclicals.
‘GOLDILOCKS’ macroeconomic backdrop (strong growth and low rates) for Equities is driving risk-on sentiment globally which should benefit Emerging Markets, including India.
Q) Valuation continues to be a worry, but which are the factors that will drive markets higher?
A) Economic recovery and abundant liquidity can drive a bull market in Indian Equity markets. Positive news on the vaccine, faster-than-expected economic recovery, continuing fiscal and monetary policy support, and high liquidity should provide a supportive backdrop for stocks.
The outlook on most sectors is turning positive. Domestic cyclical and financials can play out in 2021. Although markets seem fairly priced, two factors should continue to drive markets over the medium-to-long term.
1) Continuing upgrades to economic growth and earnings estimates can provide an upside.
2) And in an environment of low-interest rates and high liquidity, valuation multiples can be higher than their long-term averages, thereby justifying higher equity valuations.
Q) We are at the cusp of a new cycle – what should be the investment strategy of investors?
A) In the current environment, it would be best to take a 3-year view as the economy and earnings would have normalized by then. From current levels, we can expect a 10-12 percent CAGR return for the Nifty.
During the economic recovery, mid-and-small-caps typically do well and could outperform largecaps. An environment where market breadth is improving can provide opportunities for active funds to generate alpha.
Hence, investors should stay invested, continue their SIPs, and buy into any dip as any correction is expected to be temporary and minor (i.e. 5-10%). Lump-sum investments can be spread out over the next few months.
Q) We have seen some measures taken by the Maharashtra govt to support the real estate sector. What are your views on the sector and does it make sense to put money at current levels?
A) Housing sector should see a recovery in 2021. Affordability levels have reached 2004 levels due to record low mortgage rates and prices remaining stagnant for a long.
The market is also improving with government support such as stamp duty cuts in some states like Maharashtra. Debt yields have fallen too, driving investor demand for housing.
Market consolidation continues post-COVID with the market share of listed organized developers rising. Liquidity for developers is also improving due to asset sales as foreign investors are investing in Real Estate Investment Trusts (REITs). Overall, we have a positive outlook on the real estate sector.
Q) What are your views on the upcoming Budget? The fiscal deficit is likely to remain high but what could cheer equity markets?
A) A fiscal boost to growth is expected in the upcoming budget. With real GDP growth expected to be around 12 percent in FY22, tax collections should bounce back giving the government sufficient space to increase expenditure. Also, the government appears to be willing to spend now, as it believes the growth multiplier would be higher in an economy without Covid-19 restrictions.
We could see a jump in healthcare spending, increased focus on urban affordable housing to boost low-skilled jobs in urban areas, and further support for PSU banks to support lending.
Overall, the fiscal deficit could remain high but a clear focus on boosting growth would cheer equity markets.
Q) What is your take on earnings and valuations? Should investors be worried in the short term and it is best to book profits?
A) Earnings that have been depressed for a few years are showing reasonably strong growth. We are entering into an earnings upgrade cycle after a long time and valuations should moderate as earnings normalize.
Earnings growth in the next three years could be higher than the long-term average. And in an environment of low-interest rates and high liquidity, valuation multiples can be higher than their long-term averages, thereby justifying higher equity valuations.
Looking at these aspects, while investors need not be too aggressive at current valuations, one should stay invested and continue to invest. We are at the cusp of a new cycle and investors should participate in this cycle.
Q) Which are the big themes you are looking at for this year?
A) Apart from Housing, the two big themes for this year could be Manufacturing and Financials. India’s growth has the highest catch-up potential post major reforms announced by the government.
The push for Aatmanirbhar Bharat should drive domestic manufacturing, private capex, import substitution, as well as exports.
The Production Linked Incentive (PLI) Scheme, which was recently expanded to 13 sectors from 3 earlier, should help to attract Foreign Direct Investment (FDI) across sectors.
Although delay in Non-Performing Loans (NPL) recognition is a key investor concern for the Banking & Financials sector, clarity is expected to emerge given that moratorium has ended and restructuring timelines are limited.
Bank NPLs are expected to reduce to earlier levels. Overall, the Banking sector’s Non-Performing Assets (NPA) should be manageable despite the COVID crisis and credit growth is expected to normalize.
Q) What should be the asset allocation strategy of investors in 2021?
A) Investors should always diversify their portfolio across different asset classes such as Equity, Fixed Income, Gold, and Real Estate, and have a balanced asset allocation as it reduces the overall volatility of the portfolio.
Gold prices are expected to remain steady and can move higher amidst low/negative real yields globally and expected weakening of USD. In Real Estate, we can expect only a gradual recovery in prices over next couple of years due to high inventory levels.
With interest rates expected to remain low, returns from Fixed Income are expected to remain depressed.
Amidst expected earnings upgrades and low rates, risk-reward for Equities still looks relatively attractive as compared to other asset classes. Hence investors can have a higher-than-median allocation to Equities with a 3-5 year horizon.
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