In conversation with Mahesh Patil Chief Investment Officer, Aditya Birla Sun Life AMC

"We Remain Bullish On Domestic Economy-Facing Sectors" 

With high level of inflation expected to persist in the near future along with more potential rate hikes, what is your outlook on the Indian equity markets in the short to medium term?


The global equity markets have seen some correction due to the challenging macro backdrop. A hawkish stance by Federal Reserve and other central banks is likely to push interest rates higher in the coming quarters and this is expected to lead to a slowdown in most parts of the globe. During these times, the Indian equity markets have been a standout in terms of relative outperformance versus other markets. We believe higher domestic demand-led growth and relative macro stability have resulted in some decoupling with other major economies globally.

Post the recent rally, Nifty has traded at a slight premium to its long-term average PE. We believe the upside from here will be a function of stability in global and local macro conditions along with continued earnings’ delivery versus expectations. We anticipate in the near term there could be intermittent corrections globally due to the current scenario. However, India stands relatively better as compared to other markets given the improving domestic macro conditions, continuing FPI and domestic flows, correction in commodity prices and expected improvement in festive demand. 

What changes have you made in your equity funds in view of the rising interest rate and volatility over the last few months? Currently, are you more skewed towards growth or value stocks? 

As the economic recovery continues, we remain bullish on domestic economy-facing sectors such as consumer discretionary, banks, real estate and capital goods. Given the challenging global macro situation, we are underweight on export-driven sectors such as commodities and IT. Overall, we are overweight towards high-quality growth stocks given the challenging macro environment in the near term. 

With a mild recession anticipated in the US and Europe, is it sensible to exit international funds? What is your advice to retail investors who have parked their money in international funds?

We would advise holding on to the existing international fund position as we believe that a large part of the macro risk is now priced in and inflation has peaked in the US. Also, international funds provide diversification benefits to investors. Accordingly, one should continue holding on to their existing international fund position as part of an overall asset allocation strategy. 

What’s your outlook on the Indian debt markets and yield curve post RBI’s recent hike in policy rates?

Given the Federal Reserve’s forward guidance, further rate hikes by RBI are likely with our terminal rate expectation of 6.5 per cent. However, there is quite a bit of uncertainty about the terminal rate given the extraordinary global backdrop. In a scenario of reducing liquidity and further actions by MPC members to fight inflation, we have witnessed an increase in rates at the shorter end of the yield curve. We continue to advocate for investors to invest in ultra-short-term, lowduration, floater and short-term funds, which continue to be the best risk-adjusted places for fixed income investors. Investors can also look at target maturity debt index funds matching their investment horizons to benefit from the increasing rate hike cycle. 

Which three major emerging investment themes do you expect to dominate over the next decade?

The three major emerging investment themes are:

1. Discretionary consumption
2. Domestic manufacturing
3. Digitisation and new technology.

How should retail investors navigate the current market volatility with mutual funds?

In the current environment, it would be best for investors to keep their asset allocation close to median levels, continue with their SIPs and add any correction to increase their exposure to equities. Overall, we expect Nifty earnings to grow at a 13-15 per cent CAGR over the next three years and generate returns slightly below earnings’ CAGR over the next three years.