Downside protection is priority in this environment, says Mahesh Patil

Mahesh Patil, chief investment officer for equities at Aditya Birla Sun Life AMC
The markets are in a downward spiral since the presentation of the Budget in July, with foreign portfolio investors (FPIs) on a selling spree. Mahesh Patil, chief investment officer for equities at Aditya Birla Sun Life AMC, tells Puneet Wadhwa that investors are looking for some clarity on whether the market has bottomed out or there is still a risk of a significant downside. Edited excerpts:

1. Do you think selling in the markets since the Budget has been overdone?

The market sentiment has soured after the Budget. There are concerns about a gradual slowdown in consumption. The slowdown is likely to continue in the near term, as the government has not announced any direct short-term measures, so far, to boost consumption. This has impacted the market sentiment negatively. The market may remain subdued for some time until we see signs of a recovery in the economy, as well as the resolution of some of the issues related to non-banking financial companies (NBFCs).

2. How have you positioned your portfolio thus far in CY19?

In the current environment, downside protection has become a priority and we are positioning our portfolio accordingly. Over the past year, we were underweight on a few of the heavyweight names in the large-cap space and have corrected the same. We continue to maintain an allocation to mid-caps and expect them to do well. Currently, we are overweight on pharmaceuticals and health care, low-ticket consumer durables, industrials and cement. We remain underweight on information technology (IT), oil and gas, and auto and auto ancillaries.

3. Has the liquidity situation in the financial space improved?  

System liquidity has reversed from a deficit a couple of months back to a surplus of more than Rs 1 trillion now, as the Reserve Bank of India (RBI) has allowed liquidity to remain in the system after the Lok Sabha election. The government also announced measures like a liquidity backstop for NBFCs and Rs 70,000 crore for public sector bank (PSB) recap. Corporate banks will be in a better position to lend and focus on growth now. However, risk aversion towards NBFCs remains high leading to high credit spreads. There is a clear divergence between strong and weak NBFCs.

4. June 2019 quarter results have failed to enthuse the markets. What are your key takeaways?

Considering the slowdown in the economy, earnings growth in the June quarter was expected to be subdued. Based on the companies which have reported Q1FY20 results thus far, profit growth has been in the high single digits, which is in line with the muted expectations. As expected, the auto sector results have been lacklustre. But sectors such as consumer staples and consumer durables, banking and finance, pharma, and media have delivered a reasonable set of results.

5. And expectations for FY20?

Q2FY20 earnings growth may also be subdued. We may see an upturn in earnings only in the third and the fourth quarters of the current fiscal. Overall, for FY20, earnings growth for the Nifty, excluding corporate banks, is projected to be in low double digits. Headline FY20 earnings growth for the Nifty, including corporate banks, is expected to be over 20 per cent.

6. Are you facing any redemption pressure in any of the schemes you handle?

Considering the decline in the markets over the past month, investors are understandably trying to get some clarity on whether the markets have bottomed out or if there is still a risk of a significant downside. To their credit, retail investors have been patient and disciplined — as is evident in stable SIP inflows. We are not seeing any significant redemption pressure so far and have between 3 per cent and 10 per cent cash in various schemes.

7.How have SIP flows been over the past couple of months?

The domestic SIP inflow in equities has been stable at around Rs 8,000 crore per month for the past six months, which is a positive sign. We remain constructive on the Indian equity market outlook from a medium-to-long-term perspective. The next six-12 months would be a good time for investors to consolidate their portfolios. We expect SIP inflows to remain stable in the remaining part of CY19.

8. How many rate cuts do you expect from the RBI in FY20?

We are currently in an environment of easy monetary policy, which is in line with the government’s objective of lowering the cost of capital. The RBI has already cut its policy rate by 75 bps this year and there are expectations of two-three additional rate cuts in the current fiscal year. Hence, even as we face some near-term issues, lower rates should aid economic recovery in the medium term.­­­

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