Mahesh Patil, CIO, Aditya Birla Sun Life AMC, says following the recent sell-off, large-cap markets seem more reasonable, potentially easing foreign institutional investors' concerns about India's valuations and encouraging their return as global conditions improve. While domestic investments remain robust, weakening market breadth may impact retail investors, possibly leading to a slight correction in the Nifty, with midcap and smallcap stocks likely continuing ..
How would you characterise the current market for us? On one hand, there is intense selling by FIIs, and on the other hand, there is strong buying by DIIs. The problem is the middle layer, which is the HNIs, ultra-HNIs, and the retail crowd which seems to be panicking now.
Mahesh Patil: If you look at the market on two aspects, one is on the fundamental construct. There has been an earnings slowdown; the momentum which was there on the earnings side or in the ..
On the liquidity side, FIIs have been selling, again probably it is not India selling per se, but overall outflows from emerging markets which we see because of the dollar strength which is resulting in the correction over here. Post the recent sell-off, the markets, at least in the largecap space, are now looking fairly reasonable. So, the complaint which FIIs had about India being expensive, to some extent that gets corrected and they might come in as things normalise on the global front.
Domestic flows are still fairly strong, but the retail money which is there, probably still could get impacted as the market breadth continues to weaken and that is a slight worry which might means the market could remain slightly depressed where the Nifty might correct a bit but the broader market, the midcap and smallcap can continue to correct in this kind of market environment.
What is your understanding about how much cash mutual funds currently have? Everybody is now trying to understand how long this FII selling will be digested or how much more ability domestic funds have to absorb this Rs 3,000-4,000 crore FII selling on a daily basis?
Mahesh Patil: The overall cash level for the industry would be on an average around 4% to 5% range, which is pretty reasonable. We have also seen that because of the market indicators, a lot of these balanced advantage funds are also currently running low on equities, around 40-45% or so. So, there is room for them to deploy that cash in case of a market correction from here. I would say that the overall cash in the mutual fund would somewhere be around Rs 1.5 lakh crore or so w ..
But I would guess that the FII selling that we are seeing currently, with Trump taking office, the policies are now getting clear. So, the initial sell-off, because of the uncertainty, should wither down now. But yes, if the onslaught continues, you might see the cash levels dwindling. But on the other hand, domestic inflows are still fairly strong. We are still seeing roughly around Rs 35,000-40,000 crore for domestic mutual fund inflows. If you look at the PF money which is coming in, that is ..
But in this environment, the high PE stocks are getting punished even more on slightest negative news. Do you believe that we are entering a phase where these valuations could normalise a bit and in this new regime we once again say that valuation matters.
Mahesh Patil: We are currently getting into a phase or regime where interest rates, at least globally, or at least in the US, have again risen. So, there is some risk, at least in the short term, for them to move further up and liquidity is getting tighter. Global liquidity is getting tighter. In India also, while the RBI has tried to take measures, because of intervention in the forex market, the liquidity is still fairly tight.
So, both these conditions are normally adverse for any high PE stock or high growth stock, where you are looking too much into the future and discounting that and that is what is seeing a correction. Also, with growth slowing down across the board, some of these stocks are getting hammered.
So, the one-way rally that we saw in the market two-three years back, is now clearly behind us. We have seen a choppy market in this period. Any slight disappointment in earnings and especially in companies where the valuations are significantly higher than their long-term average, there is risk and that is what we are seeing playing out in the last couple of months.
Indeed, there is a short-term slowdown, particularly in some of these cyclical sectors, but in such a down period, policy intervention becomes even more critical. So, what should the government do in terms of policy support that could reverse this downtrend?
Mahesh Patil: We still believe that the downturn slowdown that we have seen is a short-term cyclical downturn, to some extent was triggered by the large fiscal contraction as we saw a negative fiscal stimulus in the first half because the government spending was lower. Also, the RBI was running a fairly tight monetary policy. We have not seen any kind of easing.
But to really come out of this situation, we will need help both from the fiscal side as well as from the monetary side in terms of improving the liquidity first and then cut in interest rates which has a good probability of happening in the February policy.
Also, in the Budget, while the government has continued on its path for fiscal consolidation, they might still continue with that because the whole idea is to get the fiscal under control so that we can look at a rating upgrade somewhere at the end of this calendar year. Up till now, the government policy on the Budget has been towards long-term growth, trying to invest on the capex which is the right thing to do, but a short-term stimulus and boost is also required so that the balance of gettin ..
Where do you think excesses in the market have still not been corrected?
Mahesh Patil: Excesses still have not been corrected in a few of the high-growth sectors like EMS. EMS is a very high-growth sector, with a good potential, but there could be challenges. The assumptions of growth are really high over there.
Apart from that, capital goods, industrials, where compared to historical data, the valuations are still on a much higher level. We can now argue that in these sectors the outlook in terms of the growth is still better, but in the current slowdown we are seeing some slowdown in the private sector capex also. So, I would say industrials, the EMS sector are some of the sectors where the valuations are still frothy.
Apart from that, we have seen reasonable corrections across some of the stocks. In fact, while the index has not corrected, there are many stocks which are down 30-40%. So, clearly, the market is a divided one. Now value is emerging in a few stocks and it is going to be more stock-specific this year. We had seen those broad thematic rallies in the last two-three years, big sectoral moves. This year is going to be more stock-specific rather than betting on any particular sector.
Is the best behind some of these consumer tech and fintech stocks?
Mahesh Patil: I would not say so. There have been some corrections. We have seen a correction in some of these high growth stocks. Probably the competitive intensity in some of these companies has elevated, but these are companies where the structural growth drivers are very much in place. In some cases, unit economics are still in place. There is a short-term burn because of the competitive i ..
In the light of US strength and I am assuming that US strength is real, the high-frequency data is strong, the dollar is real, do you think it is time to align with exporters? We have seen outperformance in IT and pharma. Could that mean another six months of outperforming trade?
Mahesh Patil: We will have to see because on one hand you are talking about the US economy, the Trump policies, that Trump will be good for the US economy, and that should improve t ..
But by and large, in sectors like IT there is some tailwind. Again, for the exporters also, there is a tailwind from the rupee depreciation as we think the rupee is still slightly overvalued. There is some room to depreciate by another 3% or so from here, so that could be a tailwind.
But sectors like IT and pharma would be better placed. They are more defensive in nature, where the growth trajectory anyway is steady. In fact, IT is coming in from a kind of a slowdown and the commentary in this quarter is slightly better and they have been able to protect their margins fairly well as growth slowed down. The US is again talking about big spending on tech. So, IT and pharma would be a better place to play the whole rupee depreciation and the export play.
On the liquidity side, FIIs have been selling, again probably it is not India selling per se, but overall outflows from emerging markets which we see because of the dollar strength which is resulting in the correction over here. Post the recent sell-off, the markets, at least in the largecap space, are now looking fairly reasonable. So, the complaint which FIIs had about India being expensive, to some extent that gets corrected and they might come in as things normalise on the global front.
What is your understanding about how much cash mutual funds currently have? Everybody is now trying to understand how long this FII selling will be digested or how much more ability domestic funds have to absorb this Rs 3,000-4,000 crore FII selling on a daily basis?
Mahesh Patil: The overall cash level for the industry would be on an average around 4% to 5% range, which is pretty reasonable. We have also seen that because of the market indicators, a lot of these balanced advantage funds are also currently running low on equities, around 40-45% or so. So, there is room for them to deploy that cash in case of a market correction from here. I would say that the overall cash in the mutual fund would somewhere be around Rs 1.5 lakh crore or so w ..
But I would guess that the FII selling that we are seeing currently, with Trump taking office, the policies are now getting clear. So, the initial sell-off, because of the uncertainty, should wither down now. But yes, if the onslaught continues, you might see the cash levels dwindling. But on the other hand, domestic inflows are still fairly strong. We are still seeing roughly around Rs 35,000-40,000 crore for domestic mutual fund inflows. If you look at the PF money which is coming in, that is ..
Source Name : Economic Times