India’s Third-Largest Asset Manager Says Market Selloff A Value Buying Opportunity
India’s third-largest asset manager expects volatility in markets to remain until the next general elections.
“The Indian macro has been deteriorating for some time and has witnessed pressure along with some of the global markets,” said Mahesh Patil, co-chief investment officer of Birla Sun Life Mutual Fund, which manages assets worth Rs 2.49 lakh crore. “The pain in the broader market is to a large extent. The mid caps and small caps have also largely corrected from their peak.”
The NSE Nifty 50 Index corrected nearly 10 percent from its August peak. The broader market, the NSE Nifty 500 Index, too, corrected nearly 12 percent from its record, while the small- and mid-cap indices corrected nearly 37 percent and 24 percent, respectively.
Yet, Patil sees this correction as a value buying opportunity. “We are seeing good value emerging in the market. I think this is a good opportunity for money because this kind of correction provides opportunities to get good companies at a reasonable valuation or even attractive valuation.”
Watch the full conversation:
Here are the edited excerpts from the conversation:
The markets seem to be extremely scary. It is the global cues which are causing the scare. The U.S. Treasury yields are the highest since 2011. Currencies are under pressure. There has been mutual fund redemption. How do you make sense of all?
We have our own problems such as the liquidity squeeze and the crisis in the financial services sector. Indian macro has been deteriorating now for some time and we have seen some kind of pressure. The negative global markets have added to the woes. The near-term looks challenging. We have seen the broader markets correct quite a bit. So, the pain in the broader market is to a large extent. The mid caps and small caps have also largely corrected from their peak. It is level where the value is emerging over there.
With the global backdrop, we see a sharp correction. There may be some more pain point. From an investor perspective, both the debt and equity markets have taken a hit. So, all the asset classes haven’t done well so far this year.
Things should settle down in the near term. We have the elections approaching. The market will not go up too much. Some measures are taken by the government to infuse liquidity. That should rest some of the concerns which had cropped up on the domestic side. We need to watch out for global cues.
The U.S. equities were at an all-time high and we saw some correction yesterday. If at all we see further sell-off in the global markets, then the Indian markets could follow it.
The kind of selloff happened in the last seven-odd trading sessions has been when the U.S. markets are making their peaks. We have still not seen a correction in the U.S. markets. If that happens, then how would one arrest the downside?
If the global sentiments turn weak or if there is risk off globally, it will impact all markets, particularly the emerging markets, including India. Against that backdrop, we can see a further leg down. However, the emerging markets, in general, have seen a lot of pressure on its currency side and the markets have corrected. However, when the local markets and currency correct, it starts to look a bit attractive for dollar investors.
Against the backdrop of a global weakness, there could be more reaction which we could see. Unless we see some of the macros, such as the crude oil rally, which was one of the reasons why Indian markets started to correct in the first place. So, when those turn around, we might probably not fall to that extent and the fall will be much lower than in the U.S.
For oil, the near-term pressure is on the upside though it is not the longer-term view that oil is at where it should be above $80. Over the next three months or so, the upward pressure would remain of how the Iran sanctions play out, whether that supply from Iran goes out to the market entirely or if there is some supply coming in. That will determine where the oil prices settle down.
For India, the domestic story is good, because of liquidity squeeze and rise in interest rates. There is some fear that it would impact growth. We have not seen that. Last month numbers were not that great, particularly for consumer goods and automakers. This time, there is a delayed festive season. We need to see the demand as the domestic numbers in the last quarter were as per our expectations and the last quarter was a decent one.
The market could find support after the recent correction. The earnings growth should look strong in the near term and we have not seen any earnings growth cut. The rupee depreciation will not impact earnings. For the Nifty, the rupee depreciation adds to earnings growth by at least 15 percentage points as a lot of these stocks are positive due to the weakness in the home currency.
Is the threat of 18-20 percent EPS growth under question right now?
The sharp fall in rupee can have a kind of translation loss on the forex borrowing. For some of the companies, show it in profit and loss, while others adjust it to the balance sheet. Therefore, there could be some impact on a few companies.
The worrying sign is that some companies like in the auto space could witness a margin pressure due to the rise in commodity prices. Therefore, the ability to pass on the price increase can impact margins and there could be some downgrade to earnings.
The consensus is still around 19 percent. We are at 16-17 percent for the Nifty because we think there will be some downgrade to earnings in the sectors like telecom and cement. About 14-15 percent still looks to be reasonable estimate even with the current scenario.
If the earnings were to grow at 15 percent, then we are arguably trading at 18-18.5 percent. Are you comfortable assigning that multiple to the markets with the macros looking the way they are? or would you believe that the natural multiple in such a scenario should be a couple of notches lower?
The multiples can be a bit deceptive. If you look at the historical levels, there has been a big change in Nifty composition. The non-cyclical sectors’ composition has increased by 10 percentage points compared to 10 years back. The non-cyclical includes the financial and retail private banks, which usually has slightly higher multiple. Looking at the current macro, on PE multiple basis, the market is not cheap at least for the Nifty.
If the growth is around 15 percent and if it continues to sustain for this year and the next as once the trajectory comes in it should be able to do it. The market is at a reasonable level. It is not very expensive, and it has corrected a bit and earnings have caught up which was absent last year. The forward multiple is around a reasonable 18.5 percent. It can be 5-6 percent down from the present, where it could start looking attractive.
The selloff now seems to have exaggerated more in broader markets without the leg up coming in from the previous sessions. So, from the broader market perspective, is the lucrativeness more right now?
We are seeing good value emerging in the market at the stock-specific level in the broader market, except for the Nifty. This is a good opportunity for money managers to identify the stock because these kind of correction award opportunities to get good companies at a reasonable or attractive valuation.
Due to the weakness in the market and negative sentiments, some of the stocks are not favourite. For long-term investors, there is value emerging in the broader market. It is not that only earnings are getting significantly impacted. The quality has to be differentiated within the small-cap space but companies with good earnings visibility, good management and stable business, this is a good opportunity to build a portfolio. While the next six to nine months might not be that great, but this is the time to pick.
If you have conviction in investment, this is the time to look at stocks. That’s how the portfolio churn and transition are likely to happen. Normally a correction provides a good opportunity to do some kind of churn in your portfolio and to look at stocks which are beaten down well below the entrancing value. It is a good time for money managers to generate money, not in the near term but build a good portfolio that can generate a good alpha in the medium to long-term.
The large caps have also witnessed a big divergence. The Nifty Next 50, where all the large-cap stocks, besides the 50 stocks, we have seen a good correction so far this year. There is also opportunity in those names.
If a portfolio is heavy on financials, how should one approach?
Within the financials, there will be a split. With some liquidity crunch and the rise in the interest rates, within financials the banks with good liability franchise would do well as the cost of funds would be lower. With some amount of retail, you will continue to show decent growth. In private corporate banks, we are not still out of the credit crisis but a bulk of it is being priced in.
Over the next two to three years, they should be able to come out with lower credit cost in next one year. That’s a space. Private banks with good liability franchise select corporate banks which came with strong liability franchise have done a lot of restructuring and clean up should look good.
On the NBFC side, there will be some differentiation. We have seen a recent correction and the valuation have come off. Again, the NBFC with a strong pedigree and parentage should not be able to challenge accessing and getting fund. On the asset side, the NBFC which have got some amount of pricing power and higher net interest margins should be able to take the increase in the rise in the cost of funds. There are some pressure and growth will slow down.
With the valuation correction, they will emerge stronger and will continue to get access to funds. There will be clear differentiation in the NBFC space. We have the insurance company and asset and there it will be steady growth. The insurance space has also seen a good correction. There is good value emerging. They are steady performers compared to cyclical. We expect 15-16 percent growth in the segment.
From the outflows that we have witnessed, do you reckon that it will be isolated for September or is it difficult to predict? If these outflows continue, what kind of problems will it pose?
In September, we see outflows because of the advance tax payment. Therefore, it is a seasonal factor. Also, because of the current credit crisis, people are weary and could have pulled out more. However, it should settle down in this month. Liquidity has been infused and the RBI has taken certain measures and would take further steps to provide some window for mutual funds or access liquidity if it is required.
For IL&FS, the government has taken control over there. I don’t see large outflows. There will be some concerns on the credit side because these liquidity crisis is leading to some credit crisis in a few sectors and stocks.
Therefore, you might not see big inflows until a clarity emerges from some of this debt side. However, the outflows should get curtailed. On equity, we have seen good inflow last month though there were apprehensions that flow would go down.
My sense is we can see a moderation of flows looking at the current market scenario and a lot of noise around. We have about Rs 9,000 crore of overall equity flows including ELS, equity fund and balanced fund, put together. That number will slow down in October. We will have to wait and watch.
Are you watching any indicators from the RBI policy?
In the current scenario, we have witnessed a tightening liquidity in the financial markets. There have also been a pressure on NBFCs. We expect to see some indication of how the RBI views this scenario, how they plan to ease the liquidity situation and some kind of window provided to address the need of the hour.
There is a lot of crisis. People lending to each other are not so comfortable. If there are some steps taken to address the near-term challenge, then that is the key thing to watch out for in the RBI policy, besides the normal outlook on interest rates.