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DAILY VOICE | With economy expected to normalise by FY23, these 4 sectors can be added to portfolio: Mahesh Patil of Aditya Birla Sun Life AMC

After the sharp rally in the markets, valuations seem stretched and returns may be muted in the short term, says Patil

June 16, 2021 / 09:24 AM IST

Mahesh , Chief Investment Officer at Aditya Birla Sun Life AMC says investors should not get carried away by momentum and avoid chasing sectors and stocks that have already run up without any fundamentals or where leverage is high.

In an interview with Moneycontrol's Sunil Shankar Matkar, Patil said global cyclicals such as IT, small-ticket consumer discretionary, industrials, and financials should take the limelight based on expectations that the economy will normalize by FY23. Edited excerpts:

Q: What is the trend at MF desk now, in terms of buying and selling in the domestic market?

With the second Covid wave having peaked out and with a majority of the population expected to be vaccinated by end of the year, we can see with more certainty that FY23 will be a normal year. Some sectors may also see pent up demand. Hence, sectors such as Consumer Discretionary and Retail, Media & Entertainment, Travel & Tourism, Banking and Financials, etc. which will benefit from the re-opening of the economy are of interest, provided valuations are reasonable. We are reducing exposure to sectors such as Metals which have already run up.

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Q: The market is at record high. What should be investors' strategy and what should they avoid now?

After the sharp rally in the markets, valuations seem stretched from a near-term perspective and returns may be muted in the short-term. But investors should bear in mind that we are in an environment wherein earnings are not normalized, liquidity is very high, and interest rates are low. So valuations can sustain above their long term averages.

From a medium-term perspective, valuations seem fair as the economy and earnings would normalize by then. Hence it is advisable that investors take a medium-to-long term view in the current environment and continue with their Mutual Fund SIPs in a disciplined manner. Investors should not get carried away by momentum and avoid chasing sectors and stocks that have already run up without any fundamentals or where leverage is high.

Q: After a three-month consolidation, the market returned to record high levels. Do you think the momentum can help benchmark indices climb around 5 percent from current levels?

Global Equity markets are at record highs driven by strong global growth. In comparison, Indian Equity markets were lagging due to impact of the second Covid wave and were trading in a range but we are now breaking out as second Covid wave is easing out. Markets can continue to rise due to momentum but it is tough to say to what extent that can happen. But short term volatility can be there. So investors should be prepared for any correction on the way up. It is challenging to talk about returns in the short term but investors can expect reasonable returns over a 3-year period.

Q: Do you think the expected recovery post easing of lockdown will help India report double digit growth in FY22, though there is a lockdown impact on Q1FY22?

We have seen some demand destruction due to the second Covid wave and India's economic recovery could be delayed by six months. Due to the impact of Covid in the April-June quarter, India's FY22 real GDP growth estimates have been downgraded to around 10 percent YoY. At the same time, vaccination supply should improve in the next few months and India should attain herd immunity by the end of this year.

So, India's economic recovery should come back on track by FY23 and our outlook for the medium term remains positive. After the base normalizes, India should get back to its normal trendline of 6.5-7.0 percent real GDP growth driven by higher consumption, rebound in capex, recovery in housing sector, major reforms announced by the government such as PLI Schemes, etc.

Q: What are the top sector ideas that one can be added to one's portfolio now and why?

With the Indian economy expected to recover and normalize by FY23, global cyclicals such as IT, small-ticket consumer discretionary, industrials, and financials should find a place in an investor's portfolio along with few sectors that will benefit from the re-opening of the economy.

IT should do well as order book and earnings visibility is strong and volatility is lower even though it may not give spectacular returns. Small-ticket consumer discretionary sector should benefit from pent up demand post monsoons. Industrial sector is expected to see capex growth coming back as the economy recovers.

In Financials, larger private banks and housing finance companies (HFCs) which are more stable, have good capabilities on digital and balanced mix of retail and corporate lending book will likely increase their market share. Lastly, as an opening-up trade, retail companies with strong brand and wide distribution can be considered.

Q: Given the improving economic data points in the US along with easing COVID pressure amid large vaccination, do you think the Federal Reserve can hint about interest rate hikes and a slowdown in bond purchases plan in the second half of 2021?

The economic recovery in the US has been quite strong. Inflation is also on a rising trend there with the May CPI print coming in at 5 percent YoY which was higher-than-expected. However, it is driven largely by transient factors such as supply disruptions and higher prices for commodities, air travel, used cars and trucks, etc. The Fed has been consistently communicating that it will look this transitory high inflation and will maintain an accommodative stance till average inflation reaches 2 percent YoY and the US reaches full employment.

So, the Fed is expected to talk about interest rate hikes only by the end of 2022. The Fed may hint about tapering its bond purchases in the second half of 2021 but the actual tapering will only happen in 2022. US 10-year bond yields have declined to 1.435 percent and the S&P500 has touched an all-time high indicating that the equity markets are not overly concerned about rate hikes currently.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Jun 16, 2021 09:24 am

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