Dalal Street Voice: With over Rs 3 lakh cr in AUM under his belt, this fund manager lists 5 themes for 2022

Mahesh Patil, Chief Investment Officer, Aditya Birla Sun Life AMC lists some interesting themes for investors to look at. Low ticket consumer discretionary as well as retail sectors benefit from demand recovery and from the shift from unorganised to organised.

Patil oversees over Rs 3 lakh crore of assets under management. With over 30 years of rich experience in fund and investment management, Mahesh leads the entire investment team, comprising fund managers and analysts.

In an interview with Zeebiz's Kshitij Anand, Patil said that 2022 will be a year of transition and volatility could be high. However, retail investors should stay invested, stick to quality names and continue with their SIPs. Edited excerpts:

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Q) Having witnessed 20% upside in 2021, what are your expectations from markets in 2022, considering some knee jerk reactions seen already amid US Fed hike scenario?

A) In 2021, global equity markets had attained new all-time highs driven by strong corporate earnings growth even in the face of a number of challenges.

Going forward in 2022, we believe global equity markets are likely to see headwinds on several fronts, viz. growth peaking out, high inflation, US Federal Reserves' acceleration in tapering and rate hikes. New Covid variants are likely to play spoilsport as well. 

In India, various high-frequency indicators are showing signs of recovery. Indian economy is likely to pick up with all three drivers of the economy i.e., consumption, investment, and exports firing over the next three years.

Earnings CAGR during this period is likely to be a healthy at 15%, which should support equity markets. However, given the rally in markets in 2021, easy money has already been made.

2022 can be looked at as a year of transition as excess liquidity gets withdrawn and interest rates inch up. This might induce some volatility and correction in markets. However, the trend in equities is likely to be upwards. On an overall basis, this can be a year of moderate returns with stock-specific rallies.

Q) What are your expectations from Budget 2022? Which areas are likely to be under the spotlight? Also, do you think the government will be able to maintain the fiscal deficit target?

A) The government is likely to focus on supporting growth in the upcoming budget. Indian economy is already on the road to recovery and thus government through its reforms will likely provide a boost to sectors such as manufacturing, infrastructure, real estate which have higher multiplier effects on the economy.

These sectors have seen reforms in the recent past and are expected to act as tailwinds for growth. The government is also expected to support the rural economy through schemes such as MGNREGA, construction of rural roads etc.

Along with continuing its divestment programme, the government should also provide direction to unlock value in brownfield core infrastructure assets under the 6-lakh crore National Monetization Pipeline (NMP) that was identified in the previous Union Budget.

India’s economy has been recovering and tax collections have improved over the past few months with GST collections above Rs 1 lakh cr for the sixth consecutive month because of fewer restrictions in mobility since 2HCY22.

On the divestment front, the government has only raised a fraction of its fiscal 2022 target of 1.75 lakh crore. We believe that higher than budgeted tax collections along with higher non-tax revenues should be able to partially offset the shortfall in revenues from privatization.

Hence, the government might be able to maintain its fiscal deficit target for FY22. We believe the government will be calibrated in its approach and will not be in a hurry to bring down the fiscal deficit, going forward as well. The path to fiscal consolidation will be gradual.

Q) Which sectors/themes are expected to do well in the coming quarters?

A) There are some interesting themes to look at. Low ticket a) Consumer Discretionary and b) Retail sectors benefit from demand recovery and from the shift from unorganised to organised.

c) Corporate bank balance sheets are in pretty good shape now and they should benefit from the pickup in credit growth.

d) Real estate and allied sectors such as building materials, home improvement, etc. should continue to see an uptick since some recovery is visible in the housing sector triggered by genuine demand.

e) Also, export-oriented companies are expected to do well at least for the next 1 year because the global recovery is strong and sectors like textiles, chemicals, and pharmaceuticals are expected to benefit from the China+1 strategy.

Q) How do you see India Inc. faring in December quarter earnings? Will it get impacted by the restrictions as well as curfew imposed in various states of India?

A) The December quarter saw the removal of COVID-related restrictions, increased vaccination, recovery in most sectors, the opening of the economy, and pent-up demand.

As the number of Omicron cases started rising only at the fag end of December, its impact on economic activity and the third quarter results would be minimal.

Hence, the uptrend in earnings that was witnessed in Q2FY22 is likely to continue in Q3 results as well.

The Nifty50 earnings are projected to grow 25% in the December quarter, led largely by metals, Oil & Gas, and financials.

Q) Amid higher valuations and 2 straight years of double-digit gains, how should retail investors prepare for 2022? Do you see a similar growth in demat accounts this year, like we witnessed in 2021?

A) Post the significant rally in markets in 2021, we expect 2022 to be a year of modest returns in equity. We believe the markets will be more discerning this year compared to a secular rally that was witnessed in the previous year.

Investors can expect moderate returns along with a stock-specific rallies for fundamentally sound companies in the short term.

With the expectation of volatility, retail investors are advised to stick to professionally managed funds to bring down the risk component in their portfolios.

Also, any correction should be looked at as an opportunity to add. We believe broad basing of investor base and thus the exponential rise in demat accounts is a structural story that is going to play out over the coming many years.

India largely remains an underpenetrated market with just 5% of the population holding demat accounts, compared to 14% in China and 32% in US.

Hence, the market size and demographics provide a huge and sustainable opportunity for this to play out.

Q) Should one add more international funds, stocks, ETFs to their portfolio given that US Fed plans to hike rates in 2022?

A) The ultra-stimulative policies set out by Fed at the onset of the pandemic supported the impressive rally in US equities over the past two years. After a long run-up, policy normalization could induce some volatility, and valuation multiples could normalize.

However, past four rate hike cycles suggest that although stocks typically sold off immediately following the first Fed rate hike, S&P 500 was higher 12-months after the first-rate hike.

Also, international equities are an important constituent of any portfolio from a diversification point of view. Hence, investors can maintain an 8-10% allocation to the international component in their portfolio.

Q) The market looks overvalued from the Warren Buffett indicator (M-cap to GDP). Should this ring a warning bell in the minds of investors?

A) Valuation multiples for Indian equities seem elevated currently given depressed earnings and high liquidity. However, India provides better visibility to economic and earnings growth.

The economy is expected to go back to the real GDP growth trajectory of 6.5% by FY24. In an environment where the outlook is improving, the multiples can remain at a higher level for a longer period.

We have seen this occur in the US markets where this metric was on a continuous uptrend supported by growth. We believe India is on the same path.

Corporate earnings too are likely to grow at a 15% CAGR over the next three years, which is higher than the longer-term average.

Also, several new-economy start-ups are getting listed which will add to the market cap. Going forward India’s market capitalization can grow faster than nominal GDP growth driven by four factors – (1) a larger economy, (2) larger share of formal economy, (3) a larger share of Indian companies in the economy, and (4) listing of new companies.

On an overall basis, though the Market-cap to GDP metric seems to be on the higher side, but we think it may continue to sustain at these levels.

Q) Any top 3-4 success mantra for retail investors for 2022?

A) 2022 will be a year of transition and volatility could be high. However, retail investors should stay invested, stick to quality names and continue with their SIPs.

They should maintain their target equity allocation as equities have better risk-reward over the long term. Also, any incremental correction in the markets should be seen as an opportunity to add exposure to equities.

Investors should take measured risks and stick to quality to protect their portfolio from a downturn.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)