In conversation with Mahesh Patil, CIO, Aditya Birla Sun Life AMC

In this exclusive interview, Mahesh Patil, CIO, Aditya Birla Sun Life AMC, elaborates about the existing equity and debt markets in India while comparing them to how the global markets are playing out

Are the increasing US’ bond yields posing a substantial concern for both the Indian equity and debt markets?

Rising bond yields and ‘higher for longer’ commentary by global central banks remains a near-term risk for both global and Indian markets. From an equity market perspective, we saw some corrections in most global indices in the previous month due to the concern of rising rates. However, the Indian markets continued to be resilient with bouts of volatility. We believe the ‘higher for longer’ rate scenario globally will have a rub-off effect in India and rate cuts anticipated in the early part of the next calendar year have now been pushed back to the latter part of the year.

However, valuations are still quite reasonable and not excessive, as for example, one-year forward PE multiple for the Nifty is at the 10-year average. Hence, rising rates may not have a significant impact on valuation multiples. From a debt market perspective, we believe the recent step by the Reserve Bank of India (RBI) to announce OMO sales as a preferred liquidity management instrument will support Indian bond yields and protect rate differentials versus the rest of the world. Also, if we look from a medium-term perspective, favourable growth and inflation dynamics locally as well as bond index inclusion-related news flow are the key positives.

As we near the corporate earnings’ season, what key factors should investors monitor closely?

Commentaries across various sectors will be monitored in the upcoming results’ season. Some of the major ones being: In IT, we need to watch FY24 revenue guidance for IT services, deal pipeline and the US macro environment. From the banking sector perspective, commentary on loan growth and NIM trajectory will be crucial to gauge the pace of expected moderation. On the infrastructure side, outlook on capital expansion, ordering activity and execution traction for investment-led companies will be the key factors.

On consumption, the outlook on revival in rural demand and lower income households along with consumer sentiment or optimism related to the upcoming festive season and marriages will be keenly watched. In general, the earnings’ estimates for global cyclicals have been impacted whereas the earnings’ sentiment has improved across most domestic sectors. Our expectation of healthy double-digit earnings’ growth in FY24 remains intact.

Can we expect a surge in spending during the second half of the current fiscal year, driven by the robust wedding season, festive celebrations and upcoming elections?

In the near-term, we have witnessed moderate weakness in consumer demand, especially in rural and low-income households given higher inflation and relatively weak monsoons. However, given the pre-election year and upcoming state elections, we believe government spending could potentially offset this slowdown. The second half of this financial year also comprises one of the highest wedding dates witnessed over the past few years. We expect that this coupled with the festive season and the ongoing World Cup in India will play a key role for the growth of overall discretionary consumption in India.

What is your perspective on the inclusion of Indian government bonds in the JP Morgan Bond Index, and what significant implications might this hold for the Indian market? Will the cost of capital reduce due to this development?

The inclusion into JP Morgan EM Bond Index is expected to bring in an estimated USD 25-30 billion to India over the course of 10-12 months starting June 2024. Inclusion in the benchmark will improve the basic balance of payments’ funding gap. This is a long-term positive development for Indian economy, bond inflows, yields and appreciation of the rupee. Apart from enhancing the overall credibility of the Indian markets, the wholesale-funded banks and non-banking financial companies are also expected to benefit from lower cost of borrowings on account of enhanced rupee liquidity in the system.

Given the recent escalation in global tensions, how do you foresee the performance of the Indian markets over the next few quarters? 

We believe that the current escalation in global tensions may have a limited impact. In the near term, there might be some consolidation given higher crude oil prices, higher for longer monetary policy outlook and uncertainty around the upcoming state elections. However, continuity in reforms, expected start of rate cut cycle in FY25 and revival in private capital expansion cycle are the key medium-term triggers for the market.

What is your take on active versus passive investing especially in Large-Cap funds?

India is at a very nascent stage in terms of mutual fund penetration, and we believe both active and passive funds have reasons to grow exponentially going forward. We reckon that there are various opportunities to create alpha over the benchmark in an emerging economy like India, especially in the Mid-Cap and Small-Cap space. In the large-cap space as well, historically we have seen that there have been various changes or exclusion of stocks in the index due to several reasons, which have led to churn and rebalancing in the overall portfolio.

These instances in a way reduce the arbitrage of investing in a passive fund. Large-cap funds have the benefit of diversifying a small portion of the holdings into mid-cap and small cap names, thus benefiting from a broader market rally. Over and above this, professional management comes in handy during times of volatility and swift decision-making in the case of an active fund. This is particularly true in the case of novice investors who may not be able to read the fine print of the markets in time.

What will be your advice to moderate risk-taking retail investors at the current juncture in terms of asset allocation?

At this juncture, we expect the markets to consolidate and advise investors to maintain target equity allocation closer to the median levels with a tilt towards large-cap. Given that interest rates are near their peak, there are expectations of moderate equity returns while fixed income returns should also be reasonable. There could still be further legs for growth in gold and silver given macro uncertainty globally. Hence, risk reward seems balanced across asset classes, due to which we recommend a multi-asset allocation approach during the current environment.

Considering the growth trajectory of SIP investments, amidst the outflows of FIIs and increased domestic purchasing activity, do you anticipate the persistence of this trend? Will the continued outflows from FII influence domestic flows and SIP investments negatively? 

We believe that FPI equity outflow from India is a near-term phenomenon. FII flows took a breather in September 2023 with outflows of USD 1.8 billion due to increasing uncertainty on account of higher yields in the US and stronger dollar. However, cumulative inflows YTD have been about USD 15 billion, which is the highest CYTD amongst select EMs. We believe that FPI equity inflows may return as rate cut cycle resumes in India.

The Indian economy continues to be relatively better placed across key emerging market economies. Retail investors have continued to keep faith through both SIPs and investing in direct equities amidst market volatility. This shows an evolving maturity in the approach of retail investors. Steady pace and increase in SIP flows also tells us that they believe in the long-term story of India. We expect the strong SIP flow to sustain going forward. As said before, investors are placing strong trust in Indian economy and this will lead to a favourable investment climate.