The macro situation has eased off and that makes us more positive from a medium to long-term perspective, Mahesh Patil, Co-CIO, Aditya Birla Sun Life Mutual Fund, tells ET Now.Edited excerpts:We have gone from too much of bad news to too much of good news within 40 days! 66860470 66859460 66848762 Things have turned quite a bit on the positive side. About a month or so back, there were global challenges. We had oil at higher levels. The crisis in the NBFC sector was really bad and was trying to pull down the market lower. All those things have eased off and that clearly caps the downside for the market. The upside is still sometime away.Why is that?In terms of growth, we were looking at some slowdown pockets after this festive season. In pockets, the growth has not been as expected. Some downgrades have been seen for this fiscal year. In fact, at the beginning of the year, things were looking very good but after this quarter, there has been slight cut down in terms of earnings growth estimates for this year and then we have elections. So, the outlook remains positive after this. The bias remains up but the big move in the market will take some more time. While the liquidity situation has eased off, it is still fairly tight in the market though inflows are strong. The good news is that the sentiment towards India and the emerging markets has turned a bit positive and that was a big drag for India. Throughout the year, we have seen huge outflow from emerging markets. Now a view is coming up that emerging markets could do better because of the huge underperformance and also the dollar strength that was weighing them down so far. The macro situation clearly has eased off for the better and that makes us more positive from a medium to long-term perspective.Is it time to take those tactical calls on the portfolio and allocate more to smallcaps or still play safe and stick to largecaps?In the last couple of months, smallcaps and midcaps have steered it out. A couple of the stocks have bounced back pretty smartly though it is not across the board. Some stocks are still languishing and clearly the market is much more discerning when it comes to the small and midcap space. Only the better names or companies with less corporate governance issues and earnings visibility are doing well. For the next three to six months, the small and midcaps might not do all that great because of elections and lack of clarity in terms of economy outlook. But clearly this is a time to start looking at some of these stocks. Valuations have corrected significantly year till date. There has been earnings growth in some of the small and midcap names in the last couple of quarter. We are not averse to small and midcap names at this point in time. Look at these stocks selectively and add to the portfolio, hoping that once we have a clarity on the election outcome and overall macro growth, they should do better.Will NBFCs be tied over short-term woes? Are you looking for value in high quality names because they corrected in the mayhem?Yes. NBFC challenges in terms of liquidity and rollovers which was a big problem a month back has eased off though the market is still tight. Funding is still not available easily. The cost of borrowing has gone up for the NBFCs by 100 to 125 bps and that will have impact on some amount of margin pressure. You will not see it in this quarter because a lot of NBFCs would have passed on that increase initially but it will start affecting going forward and there will be some moderation in growth in overall lending. If we factor in these two factors and then look at the NBFCs, a few of the stronger NBFCs have done fairly well in terms of asset quality. We do not see any challenges over there. Also NBFCs with strong parentage should not really have a challenge in terms of raising funds. They should do well and the correction has happened. NBFCs have corrected quite a bit. Some of the corporate banks also have a higher risk. They have moved up. So, the risk reward in select NBFCs for a long-term investors is looking good because the NBFC model will remain here. There have been some challenges but that will compliment the banking system.Why are HFCs getting smoked if the growth is so strong?HFCs will continue to remain depressed. NBFCs, which are in the vehicle finance side or SME funding, have bounced back but not the housing finance companies. There are two parts to it; one, the margins are always wafer thin in retail mortgages. The HFCs to make the margins need high yield developer book and see to it that the LAP portfolio was contributing to higher yields. Clearly, there are concerns over part of the developer financing book. The tightening of the market itself has squeezed out some of the funds to the building sector developer side and that could lead to some amount of stress. That is what the market is fearing and we will have to wait and see over there. On the mortgage side, the banks have become much more aggressive and directly competiting with NBFCs. Banks’ cost on the liability side remains fairly competitive and so there would be margin pressure over there. As the margins came under pressure, these stocks got de-rated and there was concern over the asset quality over developing financing in a couple of names.Is it time to look at metal trade again?Metals remain slightly tricky because the numbers have been fairly strong. But since metal is a global commodity, global factors need to be really monitored and they change fairly fast. There have been some concerns about global growth. We have seen that lately in China which is a large consumer as well as producer of metals. With Chinese growth slowing down and talks about trade war, concerns about China’s growth going forward is weighing down on the stocks.Therefore, the metal stocks, despite good numbers, have not really done well and the PE multiples have got de-rated because of those concerns. More recently, China has not carried out as much production cuts as was expected. This month is critical because we are getting into the winter months and that is when the real cuts to control the pollution levels will set in. We will have to wait and see because prices have come off in China, especially the steel prices because of inventory build-up. I think we are coming into a season where prices may move up because of production cuts. So the sector still looks good in terms of valuation and overall deleveraging but global outlook remains a bit uncertain and one has to be slightly more cautious in terms of how the macro data points are shifting and then take a call. We are watching all these developments in the global front and then taking suitable actions in the portfolio.How are you playing the crude cool off? Are there any crude sensitives -- aviation, OMCs, paints, etc, -- wherein RMC cost would come down sizeably?A lot of companies in this quarter has seen margin pressure. Top line growth was fairly good and the margin pressure was because of some rise in prices of crude derivatives and also rupee depreciation. Both these things have corrected and that should help some of these companies to get some kind of lever in terms of improving margins going forward especially where they have got the pricing power. Due to rise in crude derivatives, oil marketing companies (OMCs) and paints companies faced concerns over marketing margins. Gyrations in crude prices would give some relief on the margin but these stocks are not really cheap and some of them have bounced back. For further outperformance, the underlying growth has to be strong and that is what the market will look at in these names.We are getting into a month where in December if there are cuts by Saudi Arabia, you might see some bounce back. If they are only going up because of the crude oil prices, you could probably see them retracting a bit.If somebody wants to take a year off and come back by 2019, how much return would you give? Probably double digit returns would be possible.You would not rule it out?I would not rule it out because we have had the one year of consolidation in the market which is good and the valuations, the multiples which were looking fairly high have corrected. There has been some amount of earnings catch up and market correction. Overall, macro conditions have eased off. So valuations can be secondary. If growth outlook is improving even at the margin, that can take the markets higher. I would not rule out double digit returns though it will be low teens returns.Obviously a lot of things will happen over the next one year. We have elections. On the global front, there will be easing off of the liquidity . We have to see how that pans out. Some slowdown in the global growth would be there. It will be an eventful like year.At the margin, I would say barring the election outcome (and even that should not matter much), I would bet that market should scale new highs. I do not know what the returns would be but I think you should see a new high by the end of the next calendar year.
from Economic Times https://ift.tt/2AyRpgd
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