Mahesh Patil, chief investment officer at Aditya Birla Sun Life AMC, shares his market outlook with CNBC TV18 and talks inflation cycles as well as slowing economic growth. Moreover, Patil sheds light on sector performances and the spaces that seem fairly valued even under inflationary pressure.
Here are edited excerpts from his interview:
What are your views about the market and where is the cycle now evolving? Has the focus moved from inflation to global growth slowdown?
The markets are at a point where we have seen them reacting to all the negative news - interest rate increases, policy tightening and the correction in the P/E (price to earnings) multiples after witnessing excessive liquidity rally seen last year.Now what is to be seen is to what extent will the interest rate rise and policy tightening impact growth and, in turn, earnings growth of companies.
The fear is that after this quarter’s numbers, there could be some downgrades to earnings to factor in the potential slowdown we are likely to witness in the next few quarters. The market probably needs to see an adjustment to that.So to that extent, while the markets look fairly valued on a price to earnings multiple or probably on a price to book value multiple. But there could be some downside if there are some downgrades in this quarter.
We are slightly cautious since the sentiment or the whole tightening process has still not gone through. And we fear some potential downgrade to earnings this fiscal year.
The automobile sector has been leading the move to the upside for a few months, and it coincided with the commodity index also topping up. Do you think the move has been too fast or are the underlying fundamentals supporting this rally?
We see these kinds of sector rotations play out - a sector underperforms, and if there is an ailment, then a sector overperforms. The automobile sector had underperformed in the last few months, mainly because of a volume slowdown. Now we see the demand coming back -- it’s still lower than pre-pandemic levels but challenges that existed due to chip shortage are likely to ease in the next one or two quarters.
So as a result, we have seen a sharp rally. But now the valuations in the auto sector are to a large extent factoring in. But by far the sector looks fairly okay and there is room for it to move up before it reaches pre-pandemic levels.
The commercial vehicle segment’s demand seems pretty strong at this point in time.
The consumption sector is coming out in a big way, is this a space that, despite the inflationary pressures, will compensate due to topline growth? Would you like to add more here?
The whole discretionary or the entertainment space and even the hospitality sector has seen a revival. This is because after the lockdowns have been uplifted, there is a rush in the way people are spending over there. We personally like this sector, because in India when penetration goes up, a lot of these categories are still not going to penetrate into the smaller cities. And as the per person income goes up, you should see structural growth there. There might be some potential of a slowdown as inflationary pressures build up, and you’ll see some discretionary spending getting impacted. In the short term there might be some disappointment in demand, but we don’t see a real challenge as this is a sector where overall growth should remain fairly decent.
What are the areas you are dipping into aggressively?
It is more stock-specific. Because with sectors we have seen that a lot of sectors which are more stable are more expensive -- in other sectors there might be valuation threats. So at a sector level, we don’t have any large bets at this point in time. Corrections have been very significant in some of the stocks, and those are the stocks where we would like to build at this point in time.