investment strategy: 2022 will be a year of transition with accelerating earnings growth: Mahesh Patil

Beware of companies with frothy valuations and not as strong earnings certainty. Other than that, I really don’t see any area where one should be too negative. Going forward, the stance will be more favorable to domestic cyclicals than global cyclicals last year, according to Mahesh PatilCIO, Aditya Birla SGA Sun Life.

2021 has been a big year for the market. Will 2022 be a flat year or a decent year?
I think 2022 will be a transition year where we move from easy liquidity, low interest rates, to an environment where liquidity will slowly decline and rates will rise. There will be a standardization of policies. Last year, markets rose solely on a recovery in risk and earnings caught up.

This year we will see earnings growth accelerate and markets will likely be more discerning and try to identify where the risk/reward ratio is most favourable, but the year should be a decent one. It won’t be as extravagant with the one-way rally we saw last year. There will generally be ups and downs in this calendar year, but in India, I am very optimistic about how the recovery will unfold, not just this calendar year, but also over the next three to five years. . I think India is at a tipping point where the whole recovery will be driven by multiple factors – investment is starting to pick up and consumer discretionary is improving.

Even on the export front, India will do better than it has done in the past. There are several pillars to this growth, which will continue in the future. It will be a more sustained recovery from now and what we should be looking at. It is good for long-term investors to stay put and take advantage of this.

Where do you choose your spots? Where is the market still reasonable and where is there room for expansion in profits and private equity?
In the financial sector. Earnings growth will be quite strong over the next fiscal year and the valuations of some of the major players in the private and public sectors are somewhere near the long-term average or a little below. Financials underperformed last year on concerns over various Covid disruptions, concerns over the NPA and slowing credit growth.

This will all start to improve in the future. So clearly that’s a fact where we not only see good earnings growth over the next two years, but also where valuations are more reasonable. Although there will always be a differentiation there with the better run banks that are more technology driven but clearly see that this space is doing well.

Apart from that, pharma is a defensive sector. The pharmaceutical industry underperformed again last year, but the reward for risk again looks pretty decent. Earnings growth should be stable. The US market has seen pricing pressure which is now easing. The domestic pharmaceutical sector should do well and valuations are somewhere near long-term averages.

There are certain pockets like utilities, oil and gas, where valuations are attractive, but growth prospects are probably not as strong.

If the heart of the market is centered on profits, how to approach the favorable scenario for inflation? Is it time to align with inflation-friendly trades – real estate, metals, commodities?
So, while inflation is undoubtedly elevated at the moment, we believe it would begin to subside in the second half of this calendar year. The bottlenecks on the supply side that were causing inflation are slowly being resolved. Overall, global growth last year was very strong. We have slowed down a bit and therefore the pressure on that side will ease. As a result, even if inflation would remain elevated, it would not be at the same level as what we have seen over the past calendar year.

But overall, pro-inflation trade, whether in commodities or real estate, should continue to do well, especially real estate. We are witnessing the beginning of a new cycle in real estate. The general environment in terms of interest rates and affordability is solidly in place and this should continue to ensure that the sector does well in the years to come. The raw materials are also quite stable. While China’s slowing growth is concerning, we are seeing many capacities shut down due to China’s carbon neutral policy.

The supply-demand balance is therefore quite well balanced there and we do not expect prices to rise further. But prices should remain fairly stable. In this scenario, commodities such as metals should also be able to show steady growth. Against this backdrop, we would expect inflation to pick up from here this calendar year.

What should we release or sell, given the current situation?
Selling is always a tough decision, but I would consider stocks where valuations have become very expensive and where there is some uncertainty. The whole liquidity-driven rally that drove everything up in the market without differentiating will give way. So, regardless of the sector, be wary of companies with frothy valuations and less certainty of earnings.

Other than that, I really don’t see any sector where one should be too negative, even consumer staples where growth has been slightly weaker and valuations are expensive. The position will be more pro-cyclical domestic. Last year it was global cyclicals. This year, domestic cyclicals will stand out.

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