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Last Updated : Nov 21, 2013 09:30 AM IST | Source: CNBC-TV18

Avoid consumer stocks; buy cyclicals: Birla Sun Life

According to Mahesh Patil, Co-Chief Investment Officer, Birla Sun Life AMC market seems to be at bottom of the cycle and is fairly priced at the current juncture but there could be pockets of valuations, especially in some of the cyclicals.


Elections will be the key trigger for the market going forward says Mahesh Patil, Co-Chief Investment Officer, Birla Sun Life AMC.


According to Patil, the market seems to be at bottom of the cycle and is fairly priced at the current juncture but there could be pockets of valuations, especially in some of the cyclicals like the banking and financials, metals and capital goods sector. "If we see a cyclical recovery from here, then these are the sectors which could do well over the next two-three years timeframe," he adds.


Patil says, they would look at buying cyclicals over a meidum to long-term view. "If one would take a medium-term or a long-term view then that is the area one would see outperformance."


He is not too bullish on realty stocks since they haven't seen significant price correction.


Q: What sense are you getting in the market – be it the US market or India? People are beginning to doubt whether valuations are justifying current and higher levels and yet the liquidity is coming? So, what would you do at such a time - go in and buy because you cannot argue against money?


A: Liquidity is something which has driven the market recently even though we have not seen any improvement in the fundamentals. One thing to look at is the economy - we have seen the economy slowing down from 8.5-9 percent to 4.5 percent, interest rates at highest levels and inflation also remaining sticky. So, whether things can worsen from here, is the call one has to take at this point in time.


We believe that we are at the bottom of the cycle. Lot of the negatives seen over the last two years are now at a point where it looks things have bottomed out, at least from an economic standpoint.


Q: The market in the last 12 weeks has gained substantially from 5,200 levels to 6,300 levels and that is also over 20 percent gain. Therefore, at this point where do you see valuation pockets?


A: If you look at the broader market, on an average the valuations are near the long-term average. So, market is fairly priced at this point in time. Especially, at the bottom of the economic cycle, the earnings would be typically depressed at this point in time, so price to earnings (PE) multiples might look higher especially in sectors which are affected by the economic downturn. So, in that sense the market while it is fairly priced, probably there are pockets of valuations within the market.


A couple of months back there was a big divergence which was there between the defensives - fast moving consumer goods (FMCG), pharmaceuticals and some of the cyclical sectors which could be banking and financials, metals and capital goods sector. That divergence is now trying to compress because there is lot of value in some of the sectors where the immediate outlook is not that great. If we see a cyclical recovery from here, then these are the sectors which could do well over the next two-three years timeframe.


In the last two years the market has started to recognise that a bit, we have seen some outperformance in some of the cyclical stocks and it remains to be seen whether we see this recovery sustaining. More importantly general elections which are there next year will be the key in terms of how the pace for the recovery will be, especially on the investment side, which got impacted severely in the last two years.


Some of the cyclical is where one should tactically start looking at it. In this space there are lots of companies which have got high leverage. I do not think those are the stocks which one would look at, at this point in time because interest rates do not seem to be coming down in a hurry though we expect them to come down eventually because inflation would come down especially when we have seen slowdown in the broader economy but there are still better quality companies.


Q: Are you saying you will buy cyclicals?


A: Yes. If one would take a medium-term or a long-term view then that is the area one would see outperformance from that perspective. However, at the moment there is no clarity so one would look at cues both from macro standpoint in terms of where interest rates are headed to be slightly oriented because there are lot of underweight positions which is there across fund managers in this sector. Defensives while they look good, the valuations especially in the consumer staple space is at an all time high.


Q: Would you buy real estate?


A: This is a sector where there are not many companies where one wants to bet because of balance sheet size.


Real estate is more region specific; if one looks at specific regions like stocks in the Bangalore market for example - we have seen a healthy growth over there in terms of volume growth and the real estate prices are also reasonable for the volume activity to sustain.


However, by and large in real estate we have not seen a significant price correction, interest rates are still high and in a lot of markets at the current levels, we are seeing volumes slowing down.

So, given that outlook, we are not so bullish on the real estate space, we need some correction for volume activity to pickup because cash flows have to improve.; while asset values are good, cash flows need to improve in this sector.



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First Published on Nov 20, 2013 11:12 am
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