- 3 years ago
- Fitch downgrades U.S.' rating
- Yields and crude prices on the rise
- Top sectoral bets
In conversation with Aditya Birla AMC’s Mahesh Patil, on Talking Point. #BQLive
- Yields and crude prices on the rise
- Top sectoral bets
In conversation with Aditya Birla AMC’s Mahesh Patil, on Talking Point. #BQLive
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NewsTranscript
00:00 Thanks for tuning in to Talking Point. I'm your host, Neeta Chai. It's an important day
00:03 to get in an important guest. Mahesh Patil needs no introduction. Johnson, right now
00:08 with his thoughts. Mahesh, great having you. Thanks for taking the time out.
00:10 Yeah, good morning, Neeta.
00:13 Mahesh, can I start off with the global piece? Because the local seems okay, and I'll come to
00:20 that. But the global piece first. One, in terms of flows that we've had for the last three,
00:25 four months, and the change in commentary, if you will, from the central banks now,
00:30 and two, any impact that you feel of this, of which downgrade of the US economy,
00:38 which has just happened overnight on either treasuries or yields and therefore on risk assets?
00:43 Yeah, so I think you're right. I think, see, if you look at year till date, it's been a
00:51 very good rally, what we've seen in the developed markets, especially in the US, right? US year
00:56 till date, the NASDAQ and the S&P has bounced back very well. Again, the reason for that was that,
01:03 A, we've seen that the growth slowed on concerns which were there in the recession. I think
01:08 they have been slightly, I mean, the overall growth has actually surprised on the positive.
01:14 We have seen global growth has been upgraded twice in this calendar year. And overall, I think
01:21 expectations that you would see the rate increases which were there will probably come to a pause.
01:28 And so all these factors led to the rally and also the technology stocks, right, which went up,
01:36 especially because of the AI boom, okay, which led to a rally in all the tech stocks. So that
01:42 has been the scenario why we saw the global markets doing well. China also did well earlier
01:48 in the early part because it's opening up, but it didn't really sustain over there.
01:51 So in this backdrop, I think recently, if you look at it, the Fed commentary, which has been there,
01:58 is suggesting to us that you will probably see one more rate hike. But I think more importantly,
02:03 is you will see rates to remain higher for a longer period of time. So while inflation is
02:10 slightly coming down, but the core inflation is still fairly sticky. And to come back to the
02:15 target rate, what the government, I mean, the central banks are looking at, I think it will
02:20 take a long time. And that's been argued. So in this backdrop, I think the slowdown because of the
02:26 tightening monetary policy, I think you will be slightly delayed. And you will see that somewhere
02:34 later part, or probably early part of next calendar year. And I think given that, and the fact that
02:40 we've seen overall, now, I mean, in US to some extent, I think while there was the monetary
02:47 policy has been fairly restricted, the fiscal side, they have continued to expand. And that's
02:52 the reason why you've seen this downgrade coming in from which, and that could have some impact
02:58 now, I think, in terms of A, the outlook over them, and also from a market sentiment perspective.
03:05 So you could see, I think, the broader correction, which we are looking at in the developed markets,
03:10 I think you could see some of that paying out now. And specifically on India flows,
03:16 last three months, we have seen very strong inflows, unprecedented inflows, almost like
03:21 $3 billion or $3.5 billion on a monthly basis. And partly of that is to do because the outflows,
03:28 which happened out of India at the beginning of the calendar year, which the money which moved
03:32 into China, that money, to some extent has come back because India offers the best growth kind
03:40 of matrix. And a lot of long term investors are now looking at India to participate in that group.
03:47 And that's the reason why we've seen a large inflows. And the money has also come in not only
03:52 from the passives and the ETFs, but also a lot of long only funds, which are looking at India
03:57 from a structural perspective. And overall, India macro situation looks fairly good. Even
04:02 an external fund, I think we are fairly comfortable. CAD is under control, the rupee has been stable.
04:07 So all these factors working in India's favor had led to the strong liquidity flow. And that
04:12 also led to our kind of a recent rally, what we have seen in our markets. And I think, so I think
04:20 overall, from here, I think the market in the short term seems to have kind of priced in most
04:26 of the positives. There is some risk, okay, which we think on the inflation side, especially in
04:31 India, I think short term though it is, will probably be overlooked by the central bankers,
04:36 because now food inflation and vegetable prices have started to go up. So the CPI inflation
04:41 trajectory, which was going down, you could see that inching up in the next couple of months.
04:46 We don't see that should have any material impact in terms of the central bank's response. But I
04:53 think, sentimentally, I think that could be a bit negative. So I think at these levels, one would
05:00 definitely be a bit cautious over here. I won't rule out any small correction from here, which is
05:05 kind of overview, technically. And there's been some complacency in the market also, which has
05:10 been that we've seen the overall, if you look at the Wicks index, is showing that it's kind of an
05:17 all time low. So I think it's better to be careful in the context of the global developments, okay,
05:23 which you have talked about. It's great to see a mutual fund manager talk about this caution as
05:31 well. I know viewers, and I know Mahesh would also say this, that we should not try and time the
05:36 market, but it's good to hear an opinion, which also speaks about the cautious side as well,
05:40 Mahesh. So thank you for that. Just trying to understand, Mahesh, looking at the fact that
05:47 India is, quote unquote, the Cynogen of so many eyes, if not all eyes, do you think corrections
05:54 would largely be short lived because of the India growth story and the promise
05:58 that we have currently at hand? Yeah, I would guess so, right? Because, as I said, the rally,
06:07 what we've seen also has been a rally, which I don't think many people are able to participate
06:12 in that, right? So it's gone up, even especially in our markets also. People have been expecting
06:18 a correction and it's not really, really happens. A lot of bystanders who were there
06:25 are trying to enter the market. And we saw the large from the FIs in the last two, three months.
06:31 But I think given the fact that India offers the best risk reward, I would say, both in terms of
06:37 growth and valuations probably not as much. But if you look at India's valuations and compare that
06:46 with the US, right, on a power P multiple, it's not all that different, right? It's only marginally
06:53 higher, but the growth differential is much better, especially earnings growth differential.
06:56 So I think now a lot of investors are starting to believe that the India growth story has got
07:04 more legs. It's not just a bounce back from the COVID lows, right? There are a lot of pillars
07:10 in the economy which are now starting to do well. I mean, it's investments, right? And
07:16 which has been one of the last components of the GDP is now starting to pick up. We've seen
07:23 good pickup in terms of the investment cycle. And with all the focus of the government ready to
07:31 drive, make in India and China plus one, I think that is gaining traction. So besides consumption,
07:35 which has been the one of the mainstay, and that too also, which was weak last year, right, because
07:41 of the slowdown, that is also expected to revive. So you will have both the cylinders fighting for
07:47 India. And I think all the reforms what we have done in the last many years, I think it's time
07:54 to really reap the benefits of that. So that's a broad narrative, I think, which is developing
07:58 in India, which will lead to investors, if any correction, which would be there would definitely
08:04 be bought into. Also, domestic flows also have been fairly steady. And there is a steady inflow,
08:09 which is coming into the markets, right from the pension fund, the EPFO, so which I think should
08:16 provide a good support to the market. So yeah, so I think, I mean, because of global factors,
08:25 okay, if there is a slight risk of, if you see a correction, I think India should probably
08:30 outperform in that period, relatively I'm seeing. Got it. Mahesh, for you, the regular inflows,
08:42 give you the problem of allocating money on a consistent basis. It's difficult to just buy,
08:48 write and sit tight, because it's a monthly affair for you, or a weekly affair or a daily affair,
08:52 as the case may be. I'm trying to understand how are you thinking about this piece of where to put
08:58 in the money to work, considering that you are the belief that there might be a corrective move,
09:03 which might get bought into of course, and therefore, where is it that you do the defensive
09:07 betting? And where is it that you still remain aggressive because earnings growth, or the
09:14 confidence of the companies in the growth at the subsidiary quarters is looking very strong.
09:20 Yeah, so I think, while we've slightly, I think market short term movements would always be there
09:25 and we can't normally build a portfolio, when you build a portfolio for such a large size, you would
09:33 take a slightly longer term view and view on your sectors, okay, where you're structurally positive,
09:38 and any correction would be an opportunity to really to add on to those holdings. Having said
09:44 that, I think, because of the near term, kind of, not exactly a top issue, but we've seen a good
09:53 rally across stocks and sectors and we've seen the earnings seasons come through. So, as I said,
09:59 we would try to be slightly less aggressive in terms of trying to chase companies, okay, where
10:08 the valuations are probably gone slightly higher, significantly higher than the long term averages.
10:14 There are a few sectors, right, whether it is the utility space, or the PSUs, or the banking sector,
10:22 for that matter, where the valuations are still fairly reasonable. One would find tend to find
10:29 some support over there. But I think what we've been doing generally is that not try to really
10:36 predict the market or time the market because it's been a bit futile. Nobody expected this kind
10:41 of a rally in the last three months, right? And if you had sat on cash, or taken that call, you
10:47 would have been significantly at the foot of the market. So, it's going to be because structurally,
10:52 if you are positive, then short term volatility in the markets, we would not really bother too
10:59 much about it and try to really raise any cash. So, our cash levels in the portfolio are kind of
11:04 a moderate, not as any significant increase. At the same time, focusing more on stocks, right,
11:10 but the bottom of stock selection is going to be key over here. We've seen this quarterly results,
11:15 also, there have been a few companies which have done fairly well. There are a few companies which
11:19 are disappointed trying to really focus on companies where the earnings growth visibility
11:24 is going to be more stable. I think that's where you want to be in this current environment.
11:28 And at the same time, also, you want to build a portfolio from a long term perspective where the
11:33 earnings growth is going to be far better than the broader economy. And these are typically
11:38 some of these growth sectors. And some of the sectors which we are looking at is the consumer
11:43 discretionary side, okay, which we think structurally India is poised where you will
11:49 see discretionary consumption increasing significantly over the whatever the next
11:54 one or two decades. Currently, there has been a slowdown over there, no doubt because of slightly
12:00 higher inflation and high interest rates. But I think the way in the demographics are the young
12:06 population, the premiumization, the aspiration levels of the young generation, that's a sector
12:11 which you would want to be structurally bullish on. So any correction, we look to really increase
12:17 our exposure over there. And apart from that, we've seen that the investment cycle, as I mentioned
12:25 earlier, we think it's the beginning of that in the power sector, the sector where we think that
12:33 you will see the step up in investments, which we have not done in the last five years, it's been
12:37 under invested over there. And the way the growth is picking up, I think we would see a large amount
12:42 of investments needs to be done in the next five years or so. So some of these structural
12:47 whatever team is okay, where we are positive on, be it the banking and financials, the
12:54 industry consumption and on the investment side, are the sectors where we would look to build upon,
13:00 if at all, there is a correction because some of these stocks have run up. But if the market
13:05 correction provides an entry opportunity, I think this is a good time to build position over there.
13:08 Vaish, you were amongst the early ones to identify this tactical uptick in autos in healthcare as
13:16 well. Is power looking of a similar nature, I would say that the stocks have varied a little
13:21 bit. But I heard you say that you believe over the next five years, there'll be a lot of investments
13:26 done. The company commentaries are looking fairly positive. So are you very constructive there?
13:31 Is it something that can give a fairly large piece of return? And part two of my question
13:36 would be, how do you then therefore play it because there are various ways to play this power
13:41 space, transmission, distribution, generators, what do you think will give the best bang for the
13:47 buck? Yeah, so this is a sector again, which we've seen what has happened is we've been a lot of
13:54 focus on renewables in the last few years. And thermal has taken a back seat, we have not seen
14:01 any major investments by any private guy on the thermal side. But I think looking at demand supply
14:06 equation, I think you will see some investments in thermal also starting to build up to get the
14:12 right balance over there. But what is happening is that these step up because India overall demand
14:16 is still growing at all six percent. And we are reaching a level where because we are not really
14:23 invested too much on the thermal side, the demand supply gap is kind of coming down. So you could
14:28 see some step up over there. And the investments on the renewable side, while it's happening,
14:34 and then the quantum is much larger because for every one megawatt of equivalent capacity and
14:39 thermal, it will require three megawatts for the renewable because the PLFs are much lower.
14:44 So the capital intensity will be much bigger over there. But up till now, there were not many
14:48 plays because a lot of things were important, right? All of the capital equipment for renewables,
14:53 be it, especially for EV was important, but obviously, a lot of domestic manufacturing being
14:59 set up under the PLI scheme. Right? I don't know whether we can play that. But I think by and large,
15:04 I would say the best way to play will be through the utilities, right, which are still available
15:11 at reasonable valuations. Okay. There were some concerns about growth. I think that is getting
15:16 addressed. And also the whole power transmission distribution because the transmission capacity,
15:24 which you will do set up for the distribution side, right, to integrate the grid, especially
15:29 for the renewable side, I think you will require a significant investment over there.
15:32 So I think the equipment guys, right, especially on the T&D side, I think could be
15:40 interesting stocks or sectors to really look at to play the whole power sector topics.
15:46 The other aspect is financials, Mahesh. And I heard you say that you are constructive there.
15:57 Some of the banks having delivered good numbers as well, aren't quite firing on the bourses. Now,
16:05 is it the fear of a market pullback that might be holding them back? Or is it that too much was
16:11 priced in already? And I think after a bit of a high test, they could start doing well,
16:15 because the commentary suggests that the growth is still intact.
16:18 Yes, the numbers on the banks have been fairly good. The only I think the market is probably
16:26 looking at is the best in terms of the margin improvement is behind us in the banks, right?
16:30 Now, it's going to be the growth. Your credit growth is what is going to drive earnings, because
16:36 with interest rates having peaked out and possibly a cut, we don't expect any cuts in this fiscal
16:41 year. There could be some dim corporation which could be there on the banks. Overall,
16:45 trade quality continues to remain fairly good. So I think banks could be generally in line with
16:50 the broader economy, right? The bigger re-rating, okay, or the earnings upgrade cycle, what we saw
16:57 last year, I think that is behind us. And that's why we're seeing some fall of consolidation
17:01 on the banking stocks. There's also the NBFCs, okay, which have caught up in the last three to
17:06 six months, because as it became clearer that the rates have peaked out, the money started to move
17:12 into the NBFCs, because they will get the benefit now of the cut in interest rates, right, in terms
17:18 of name expansion. And that's where the money has moved in. And we've seen a good performance on the
17:25 NBFCs in the last two or three months. So but by and large, I think we think it's going to be a
17:32 fairly steady sector, I think. And the growth should also be fairly strong. We've seen a very
17:38 strong growth on the retail credit. But even the corporate credit, which has been sluggish now for
17:43 many years, could pick up on the back of, as I said, if the whole capex cycle is likely to pick
17:50 up in the coming years, I think that should also provide a good boost to the overall credit growth.
17:55 So from that standpoint, I think the banks looks to be fairly okay, in terms of earnings growth,
18:01 and should do should should should provide reasonable stability is what what we think.
18:07 Okay, my final question is on, because you have a large tech fund and not necessarily
18:14 IT services fund, but the other companies as well, they've done remarkably well, after reaching the
18:20 depth sometime early or late last year, early this year. And of course, it is also caught in a bit of
18:26 a storm. So both these aspects on technology, what is your sense around that, keeping in mind
18:35 the possibility that NASDAQ having done so well, for a better part of the year might also be a
18:40 consolidation phase, possibly over the course of the rest of the year? Yeah, so see, I mean,
18:48 you're right, I didn't see it sector. And I mean, if you look at our technology fund,
18:51 it's not necessarily IT outsourcing itself. Okay, we are looking at other IT enablers also,
18:57 okay, which are there, which are these are small and mid cap companies, which have done very well.
19:02 Right. There is also some of these new age technology companies, which are now
19:06 starting to do well after the kind of fall what we saw last year, they've got their business models
19:11 in place, they are having a role to profitability, and we've seen them also doing well. But overall,
19:17 I think we think the IT sector, Indian IT stocks have kind of kind of bottoming out, I think the
19:26 growth concerns are getting priced in this part, we've seen some kind of downgrades to earnings.
19:32 Our view is that this year is going to be a period where you will see some consolidation,
19:39 earnings growth will be or top line will be much muted. But overall, I think the spend on digital,
19:43 I think that is going to continue to face a lot of companies which are embarked on the digital
19:48 journey globally. I think they, they are not likely to stop, there's some slowdown in discretionary
19:54 spend, right, which is impacting the short term growth. But a lot of cost account deals are also
19:59 getting in place. And we've seen some of these companies wearing that. So I think,
20:03 by and large, this will be a, we think this is a good time. I mean, it is as underperformed.
20:08 It's under owned also, by the way, right, by large foreign investors. And I think next three
20:15 months, I think could be a good time to really build on the sector where we see reasonable growth,
20:20 not a very high growth, okay, but good steady growth and, and good cash flow, these companies
20:26 generate good cash flows, good dividend yields, so that should provide a good support over there.
20:30 And, and given that, I would say, it's one of the sectors which is do link to global growth,
20:38 right? It's still of some kind of a defensive characteristics in that sense. Okay, so,
20:44 so I think, so we are, we are underway on the sector. But I think this is a good time to really
20:51 build and invest into a say, technology fund, okay, with say, STP or SIP over the next six
20:59 months, I think would be ideal, which can give you reasonable returns.
21:02 Sorry, and just so that I get that clear, maybe I missed it. But you are constructive on
21:07 not just the IT services, but the platform businesses as well, which you mentioned,
21:13 have now shown a path to profitability, you're constructive there as well.
21:18 Yeah, yeah. So yeah, so the some of these platform businesses or the new age companies are
21:23 also now we are able to better assess in terms of what is their profitability, okay, what is their
21:30 growth outlook. And while we've seen some rally, okay, I mean, again, we will always look at the
21:35 valuations. But there are a few of them now where which they have established their
21:45 unit economics, and also the dominance in that space, right, they have established their
21:50 leadership in that particular segment. So, so we actually in our, you know, if you look at a
21:55 digital fund, we have a good mix of IT outsourcing companies, the IT enablers, right, which are there
22:01 are some of these platform companies. And also, I think, while in NASDAQ, what we've seen is that
22:07 there has been a big rally because of some of these high tech companies which have really rallied big
22:12 time, right, based on the AI related boom, that could see some kind of a moderation over here. But
22:19 I think a lot of Indian companies, IT companies haven't really seen that kind of a growth
22:23 trajectory. Right. So, so I think you should you should see this is one of the sectors,
22:29 okay, which could be a good contrarian buy, okay, with say, next two to three year outlook.
22:34 Got it. Mahesh, so good chatting with you. Thank you so much for taking the time out and giving us
22:40 your thoughts and all the best for the remainder of the year. Thank you.
22:44 Viewers, thank you for tuning into this edition of the Talking Block.
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