'Long-term investors need not be worried now' | Economic Times

While the high growth in 2021-22 will be due to base effect, the Indian economy will grow faster than pre-covid rates in future due to structural reasons, Mahesh Patil, CIO, Aditya Birla Sun Life Mutual Fund tells ET Wealth.The high growth rate projected for 2021-22 is now being downgraded. How do you see things panning out?The GDP growth in 2021-22 may come down to 9-10% from 12-13% projected earlier. However, things are looking much better now. The recent sero survey indicated that around 2/3 of the population has developed some antibodies against covid. Large prevalence of antibodies like this is a comforting factor, because it will take us closer to herd immunity. We are seeing good progress on the vaccination front as well. Though there is a fear of a third wave, it should be manageable and we are hoping the restrictions will go away soon.Are you expecting a big recovery?Yes, the recovery will be sharp because business activity on the production and manufacturing sides are happening smoothly now. Export-oriented sectors are doing well because global growth is strong. Growth projections in the US, Europe and China are getting upgraded. So, companies from export-oriented sectors like textiles, chemicals, auto and auto ancillaries, etc will continue to do well. Our growth may come back to pre-covid levels from the second half of 2021-22.Is it not because of the base effect?No, I am not talking about the high growth in 2021-22, which will be due to base effect. Indian economy is expected to grow much better than pre-covid levels even beyond that —for example during 2022-25 — due to structural reasons.What are these structural reasons?First, we are recovering from a cyclical bottom. Our growth was decelerating even before covid due to various factors like demonetisation, GST, RERA, the NBFC crisis, etc. However, things have stabilised now.Second, the government is encouraging domestic manufacturing with a production-linked incentive (PLI) scheme. PLI is helping to increase investment and production in sectors like auto ancillary, electronic manufacturing, consumer durables, etc. Increased manufacturing and investments will help India to grow better in 3-4 years.Third, investments as a percentage of GDP contracted in the last four years and there is hope it is picking up now. It may take a year because capacity utilisation is low. However, with a lot of corporate balance sheets repaired, a clear foundation is being laid. Raising equity capital is much easier now. Investment cycle takes time to kick in, but once started it sustains for the next 3-4 years.Fourth, global growth is coming back and this should help Indian exporters to supply to the global supply chain. Manufacturing base shifting from China to other countries should also help us. The second wave impacted many livelihoods. Won’t that hit consumption?Though covid will impact it in the short term, India’s consumption story remains intact in the medium to long term. With per capita GDP crossing the $3,000 mark, India is at an inflection point. The demand for consumer discretionary increased in other countries after this crossover and the same will happen here.The fiscal situation is strained due to the earlier covid stimulus. Your view about government spending in coming years?Though tax collections are picking up, a part of it is from high tax on oil. Since the government will not want the fiscal deficit to go out of control, spending will not be as high as in previous years. That is why the GDP growth in the next few years will be restricted to 6.5-7% instead of around 8-9%. That is still good compared to global growth rate.How much of this expected growth is already priced in by the equity market?The market has been running slightly ahead of the fundamentals. Such things happen whenever financial conditions are easy. Things tend to get discounted early and probably, the market is discounting the earnings growth in the next 12 to 18 months.Also, the prevailing high valuation should not be seen in isolation. While the valuation is at a higher level, we are at the bottom of the economic and earnings cycle. So, the earnings can recover from here pretty meaningfully. The return ratios like RoE can also improve drastically from current levels. Markets now go up based on bad news on the hope that central bankers will increase liquidity and reduce interest rates. Will the market fall when the economy looks up?It is a very good question. When the economy is not doing well, central bankers maintain high liquidity and money flows to risky assets like equities due to low interest rates. Since the current market rally is fuelled by easy money, rate hikes by central bankers will result in withdrawal of liquidity and can result in a correction. However, it will stabilise soon because markets are more aligned to growth. Growth has higher impact than cost of capital in individual company valuations. As growth picks up, markets tend to move higher as earnings growth becomes the driver then. We have seen similar situations in the past.Global central bankers are committed to keeping interest rates low over an extended period. However, rate hike is a worry and one need not go aggressive at current levels. At the same time, there is no reason for long-term investors to be worried because these corrections will be transitory. There is still enough scope left. But returns will be modest as you are buying at high valuations.Sectors or themes worth betting on at current levels?Exports theme looks good. Export-oriented companies are expected to do well at least for the next year because global recovery is strong. Though valuation is not cheap, IT has low teens growth potential at least for the next 2-3 years. Domestic recovery is another theme to play from here on. If you take a 3 year view, cyclicals are good. To capture overall recovery, you can also take the route of banking and financial services. We like real estate and allied or dependent sectors like building materials, home improvement, etc also.