"Currently we are overweight on banking and financials, consumer durables, pharma and metals," says Mahesh Patil, CIO-Equity, Aditya Birla Sun Life AMC Ltd.
According to CLSA, Nifty is trading at a 50 per cent premium to its historical benchmark. Every time this has happened in the past, one ends up getting either no returns or low returns. What is your take?
We have to look at the PE multiple and interpret it carefully. Earnings are currently depressed. We have seen a reflation in the economy, but it will still take time for earnings to come back. Even before the pandemic, the trajectory of GDP growth was much lower than our potential growth rate and the earnings were depressed. On depressed earnings, PE multiple will look slightly on the higher side.
Currently, interest rates are much lower and the bond equity earnings yield ratio is only slightly higher than the long-term average. We are at the cusp of higher growth than what we have seen in the last 3-4 years, driven by big-ticket reforms. Some of the reforms were disruptive, but the foundation is being made and that could pave the way for a stronger structural growth for our economy from FY22.
Earnings growth for corporate India in the next 3-5 years could be higher than the mid-single digits seen in the past 5 years.
In that kind of environment, we are looking at a better or sharper economic recovery and stronger earnings growth than what we have seen in the past five years as interest rates remain lower than their long-term averages. If you look at the forward multiples of 2-3 years, the figures look fairly reasonable.
How are you positioning your portfolio to generate alpha?
Multiple sectors are now participating, unlike a year ago when the market rally was driven by a few sectors -- defensives like IT or the consumer sector. Sectoral rotation is now happening much faster than earlier. So jumping from one sector to another is not so easy, especially when we are managing large amounts of money.
Currently, we are positive on a couple of sectors, especially cyclicals like banking and financial services, and consumer discretionary, especially consumer durables. We have seen a big move over there and it is more of a structural trend.
At the same time, other cyclicals like capital goods could do well with the investment cycle picking up. But the emphasis is more on trying to pick up best stocks in individual sectors. The big and better companies in each sector will continue to do well. The trend of big companies in each sector gaining market share will continue.
While we continue to make tactical shifts and move across from one sector to another, our clear focus is on identifying the best companies within the sector because that will give us alpha and outperformance going forward. Having said that, currently we are overweight on banking and financials, consumer durables, pharma and, to some extent, metals.
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