Macro Economic Perspective to Markets 2019

Anupam: Hi listeners, we at Aditya Birla Sun life mutual fund have come up with a special podcast series called MF 101 in collaboration with Bloomberg Quint. MF 101 is an informative series that will help you understand the recipe behind mutual fund investments and what’s more? It’s coming from the chefs of the mutual fund buffet table. From the very own fund managers and analysts who are the manufacturers of the funds that help you realise your investment goals.

I am your host Anupam Gupta B50 on Twitter and in this opening episode we start with the year 2019’s outlook towards equity market and the economic scenario with the head chef Mr. Mahesh Patil, C.I.O (Equity), Aditya Birla Sun life mutual fund.

Anupam: Mahesh, Welcome to the show! Tell us something about yourself.

Mahesh: Let me first wish all our viewers a very happy and prosperous 2019. So I started my career as: I did my engineering and did my MBA from JBIMS in 1993, worked there as a research analyst and then joined Aditya Birla sun life mutual fund in 2005 as a fund manager and been there for 13 years, managing a team of 7 fund managers and 20 analysts and heading the equity function at this point in time.

Anupam: What happened in 2018? You know it was such a rough year, I was just looking somewhere and I think the best return that was there was on a liquid or something so what happened in 2018 in the stock markets?

Mahesh: Yeah, I think if you go back and look at 2018, it was a period of reversals and it was not only equities but across the asset classes, the returns were negative. Be it bonds, emerging market equities, developed market equities even gold, the returns were negative. So it was a very difficult year so 2018 was a period of a lot of volatility because of the strong U.S Dollar. We saw currency volatility across various countries, even oil prices shot up. So, the macro picture which was looking good in 2017 turned a bit adverse and that lead to correction across asset classes.

Anupam: So now here we hare, at the start of 2019 and we know that there are 2 broad drivers to the stock markets, one is the macro-economic perspective, the outlook on GDP growth and stuff like that and the second is liquidity. We know that the inflows into mutual funds have been very strong. From that perspective, how are the markets looking to you?

Mahesh: So, as we step into 2019, a lot of the clouds which were there on the macro-fund, I think they have started to ease off so we’ll take one by one. On the global front, okay? The U.S economy which was doing very strong and ended 2018 on a strong note, is showing signs of kind of slowing down and that is, I would say there is some slowdown in the overall global growth which meant that the strong U.S Dollar strength what we saw last year, okay, the U.S Dollar rallied almost 9 to 10 percent and that has kind of peaked out and as a result I think it will be good for emerging markets because whenever we see a stronger U.S Dollar, there is outflow of capital for emerging markets and that leads to volatility/vulnerability for emerging markets in terms with their currency and over a period of time we have seen the emerging markets have been able to repair their balance sheets, the debt to GDP ratio has come down so overall I think with forex reserves being fairly comfortable at around 400 billion dollars. I think the Rupee should also be fairly range bound. So Rupee was fairly range bound and steady in CY 2016 and 2017, in 2018 we saw almost 8-10 percent appreciation. This year I think rupee will probably move in a band of around 3 to 4 percent, is what we think which is good for a lot of our investors who are looking into it. So I think on the macro front, I think as I said earlier (headwinds?) which were kind of easing off and I think that should be good from at least the starting for the outlook for equity in 2019.

Anupam: Nice! That’s great from a macro-economic perspective, anything specifically on interest rates and inflation?

Mahesh: Yeah, so the interest rate, if you look at inflation, globally has surprised on the lower side, I mean who would have thought, with oil prices going to around 80 plus with currency depreciation, even most people would have thought that inflation will zoom up in CY 2018. But as you know headline inflation is trending at around 3 percent or so. I think the real surprise has come from food inflation. So, food inflation has consistently surprised on the lower side, I think over a period of time, I think we have seen a lot of productivity on food has actually increased and has grown much more than the actual consumption of food grains and other items, so I think that has really put inflation under check, even the core inflation has been fairly steady at around 6 percent or so. So, I think inflation will probably undershoot the RBI’s target and given that, the outlook on interest rates, we feel that there will be a pause in in rate hike and probably a reversal of that if the inflation remains below 4 percent. So over all I think it should be a fairly benign scenario in terms of interest rates and should remain here without any upward bias.

Anupam: Sure, just one last thing here on the broader perspective, it’s on the liquidity flows right? Because the last couple of years, one of the big features for stock markets in India has been the increasing retail participation. For example, I was just reading that day that as per AMFI there are 2.5 crore accounts which are doing an SIP of an average ticket size of 3000 rupees, which translates to more than Rs 8000 crore per month, that’s like a billion, billion plus dollars each and every month.

Mahesh: that’s right.

Anupam: How do you think, that is going to shape out over the next couple of years and is that going to be a factor that is going to actually support stock markets?

Mahesh: So I think post the demonetization, we have seen significant inflows into mutual funds and mainly into equity. The initial burst of money which came in after demonetization, that has slowed down because that was money which was moving in from bank deposits and getting into equity. That flow has helped. But a lot of investors looking at long term wealth creation, entering equities through the SIP route and that base has been increasing. You rightly said that it is currently around 8,200 crore on a monthly basis and we think that should remain steady here on and the reason for that is that: a) there is a lot of awareness now between investors, they are not looking at equities from a one year perspective , even during volatile times, in the last calendar year where we saw a sharp connection, people have stuck to the monthly inflows and over all I think if you look at the ownership of equity in India, it is still very low, it is still about 5 and a half percent or so and with penetration driving to smaller towns and cities. We think the flow into equities will continue, currently there has been a slight slowdown, and the last one month we have seen flows come down but that is mainly the lump sum flows which would have slowed down. But the current run rate of 9 to 10 thousand crore on a monthly basis, this will also include the money which is coming through ETFs. So ETFs have also become fairly large now, they are on 2000 crores, now the pension fund, EPFOs have to mandatorily invest around 15 percent equities, that money is coming in through ETFs so we have 8000 crores through SIP, 2000 crores through ETFs so around 10000 crore run rate I think should be sustainable and that should provide good support to equity markets specially at times when FI’s flows tend to be very volatile, we saw last year when FI pulled out almost 4-5 billion dollars, I think this flow was what was really supporting the market. And I think that balance, the right shift between…the balance between FI inflows and domestic inflow, I think should do well to reduce the volatility in our markets compared to some of the other global markets.

Anupam: Ok Mahesh, now let’s get to specifics ok? We’ve spoken about how the broader macro perspective and liquidity seems to be good. Let’s get into specific things. First of all, what’s the overall outlook for 2019 for stock markets?

Mahesh: So, I think after 2018 which was a pretty bad year for the markets, we think that 2019 should be a better year because: a) we are seeing on the micro front, things are starting to improve, clearly earnings growth, corporate earnings growth is the parameter and that’s what really drives equity markets from a longer term perspective, we are seeing a recovery over there. The early signs, I mean this quarter has been kind of a mixed bag but I think we are seeing FY 20 as we move forward, pretty strong recovery in earnings primarily driven by financials, mainly the corporate banks. So the banking sector has gone through a lot of pain and high N.P as we’ve seen that peeking out. There has been good recovery because of the bankruptcy process, the IBC process and we see overall slippage is coming down so a big strong recovery in the corporate banks and across the sectors, I mean some of the domestic cyclicals should show a good recovery getting into FY 20.

Anupam: Great! Let’s talk about specifics in terms of broad sectors or so to say large caps vs mid and small caps right? Because mid and small caps, 2018 was rougher on them than the large caps. What’s your view on these two broader areas of the market, large caps and mid and small caps?

Mahesh: So, in the last calendar year we’ve seen the mid and small have seen a signification correction. While NIFTY was more or less flat-ish or mildly higher. The mid cap index was down around 18 percent, the small cap index was down 28 percent and post that I think the mid and small cap valuations which had gone higher and we were worried at the beginning of the last calendar year, I think that has moderated down, so now if you look at the valuation of the mid cap, they are slightly below the large caps, small caps would be still below which is probably in line with their long term average multiples.

Anupam: Sure.

Mahesh: And the earnings growth in the mid and small cap is also improving, a lot of companies were making losses, they were seeing a turnaround over there and as the domestic economy recovers, you should see a better growth trajectory in the small and mid-cap space. So, I think the risk reward looks favourable now for small and mid-caps and I think investors should also, in their portfolios have the right allocation towards each of the categories of funds depending upon the risk return and the risk appetite of individual investors.

Anupam: Great! Last question for our listeners, someone who’s totally, completely new to equities and stock markets and who wants to start there, who wants to make beginning into investing into stocks, what would be your advice to them?

Mahesh: So I think anybody coming new into equities,: a) I think should first understand that the near term in the markets can be volatile so while there is always a tendency to really make one go investment I think, we’ve seen that investors over a period of time who have come through the SIP route have been able to take care of the short term volatility so I think it’s best to start with small investment and invest regularly, increase that allocation, initially make a small allocation towards equity and initially I would advise for a first time investor to really choose a simple product okay? So the best fund would be a kind of a multi cap fund or a large cap fund or somebody looking to steady lower volatility a balance fund, where the equity component would be like a multi cap fund and some component of debt would also be a good vehicle to really start off as an initial investment and slowly as one gains more experience and once they diversify the portfolio, one can add, say a mid-cap and small cap fund to the portfolio and then in advanced stage one can add one of the thematic funds and that’s how the approach and journey should be for new investors who would like to get into equities through the mutual fund route.

Anupam: Fantastic! And on that positive note folks, that is a wrap for most interesting know hows, continue listening to our podcasts MF 101 or simply follow the blog page of Aditya Birla Sun Life Mutual Funds, Bloomberg quint, IBM podcast or wherever you get your podcasts from. If you had any queries or some specific subjects you want us to talk about, with regards to mutual fund investments, reach out to us on our Twitter handle @abcabslmf. Thank you for listening to this podcast!

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The views and opinions expressed herein are personal and do not necessarily reflect the views of Aditya Birla Sun Life AMC Ltd (“ABSLAMC”) /Aditya Birla Sun Life Mutual Fund (“the Fund”). ABSLAMC/ the Fund is not guaranteeing/offering/communicating any indicative yield/returns on investments.”