Peak market returns a thing of past: Aditya Birla Sun Life AMC's Patil

Mahesh Patil, chief investment officer, Aditya Birla Sun Life AMC.
Mahesh Patil, chief investment officer, Aditya Birla Sun Life AMC.


  • The CIO expects only 10-12% market returns in 2024 and is positive on banking, automobiles, industrials, consumer discretionary, information technology, and healthcare

With peak returns in the markets already behind, Mahesh Patil, chief investment officer at Aditya Birla Sun Life AMC expects a subdued 10-12% return for investors in 2024

He advocates for a focus on sectors with steady growth and clear visibility in the current scenario and is positive on banking, automobiles, industrials, consumer discretionary, information technology, and healthcare as areas for investment.

The surge in small and mid-cap investments might moderate due to recent regulatory concerns, Patil told Mint. He expects large caps to outperform midcaps and smallcaps going forward. Edited excerpts from an interview:

India’s inclusion in the JP Morgan bond index has resulted in a surge in FPI investments in government securities (G-Sec). Should investors raise debt allocation?

We expect a rate-cut cycle in India to begin in the first half of the next calendar year, though it may be a shallower one. With the fiscal deficit in check and about $30 billion flows in government bonds from foreign investors as a result of inclusion in JP Morgan bond indices, the 10-year G-sec yield is expected to bottom out at 6.5% in the coming year. We also expect inflation to behave with core inflation at recent lows. Thus, it would pay to dial in duration and for higher returns in bonds and tactically increase allocation as the risk-reward is reasonably attractive compared to other asset classes.

Do you think large caps will begin outperforming mid- and small-cap after four years of underperformance? Which sectors are you bullish on in the large-cap space?

Given that the relative valuation of large caps is attractive compared to mid- and small-cap and the fact that the market cap share of large caps is at a historic low, there is a case for mean reversion. The over-exuberance in small and midcaps leading to large inflows in this category of funds is also likely to moderate after the recent concerns raised by the regulator and making mutual funds provide more disclosure to make investors aware of the risks. Hence, outperformance of large caps over mid and small caps is likely going forward. We are positive on sectors like banking, autos, industrials, consumer discretionary, technology and healthcare.

Do you find any sectors appealing, especially with the upcoming election?

I don't foresee the upcoming elections significantly impacting the market or specific sectors. While capital goods may experience a slowdown in order books, their long-term outlook remains positive.

Despite global economic concerns, IT companies have already factored in these issues in their current share prices. The IT sector experienced downgrades in growth and earnings last year due to discretionary spending cuts. Although there's a slight pullback, likely due to the US slowdown, it seems more like a deferment. The ongoing shift towards digital, with only 40% completion in cloud migration, is expected to persist. Overall, I anticipate slightly muted growth in the IT sector this year but still foresee high single-digit growth, making it a promising defensive choice.

Are there any other dominant themes that you are seeing, probably like any plays on data centers, green hydrogen?

The power sector, encompassing both renewables and thermal energy, is gaining momentum, particularly since there has been limited investment in the last five years. To address the energy deficit, there's a push to increase thermal capacity, and the government has raised its targets in this regard.

The government's emphasis on manufacturing, underscored by initiatives like the PLI scheme, is expected to gain traction. This bodes well for industrial and capital goods companies, and also raises the possibility of a potential pickup in private sector capex as a result.

All that said, big returns in the markets are already behind us. Considering sectors with steady growth and good visibility would be prudent in the current scenario. We do not expect any larger return from the market in 2024. We only anticipate around 10-12% return.

With sectors like defence, and railways having run up substantially, are you still looking at pure plays?

Many are eager to invest in these sectors because of the positive news flow, but stocks are outpacing the fundamentals. We won't pursue that trend. We are focusing on sectors where we seek greater comfort in valuations within the current market conditions. In case of a correction, certain stocks may experience significant drawdowns if sentiments turn adverse, and we aim to avoid that. If defense stocks are priced too high, we prefer to avoid them. We feel comfortable only when the fundamentals align with the price.

Has expensive valuation prompted you to look at value stocks instead of growth stocks?

We are looking at valuations concerning their growth. Initially, some value stocks were reasonably priced, but now even so-called value stocks have become more expensive. Although they may not be extremely cheap, during a correction when valuations become more reasonable compared to historical averages, you would consider looking at those stocks.

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